P.A. Semi + AuthenTec

I think we should leave it in. All right. Yes, Melbourne, Florida, which Melbourne, Australia might be more of a tech hub than Melbourne, Florida. Welcome back to episode 30 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today's episode, we're covering two acquisitions that we believe go together nicely. Apple's acquisition of PA Semi and Authentech.

We think it's a really nice way to mark the 10th anniversary of the iPhone just a few weeks ago. These acquisitions led Apple's A-series chips inside the phone and the Touch ID sensor, which have a nice confluence where they work together well. Indeed. David, how are you doing today? I am doing good. I am in cold but sunny Boston today. Hey, I'm in cold but cloudy Seattle. It's kind of crazy that this is episode 30. I feel like we need like a birthday party for Acquired or something. We're getting old. I know.

I know. Well, I'm marking it by being highly, highly caffeinated. And for listeners, most episodes we record in the evenings. And today I'm recording from home. David's recording from the road and a sip of coffee. Morning show. Yeah. All right, listeners. Now is a great time to tell you about longtime friend of the show, Vanta. So, David, I want to paint a picture that many founders listening will recognize. You're about to close your biggest customer yet. The product team has hit a bunch of milestones. The sales team built this fantastic relationship. Everyone at the potential customer is fired up.

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All right. Should we dive into it with the history and facts? I think so. I just want to throw in a quick note before we dive in. We want to say if you've been a listener of the show for a long time or if you're new to the show and like the episode, we would love a review on iTunes. We'd really appreciate sharing with your friends on Twitter, Facebook, LinkedIn, emailing out to your company, whatever.

whatever you feel is appropriate. That's how we grow the show and it's how we get new listeners. And also want to let everyone know we have a Slack channel. We talked about it a lot at earlier episodes in the show, but haven't mentioned it in a while. There's over 400 of us in the Acquired community hanging out and talking about deals that happen in real time that are too recent to cover on the show, talking about past episodes, sharing tips, posting jobs, all sorts of things. So join us. If you go to acquired.fm, you can join the Slack there. Yeah, awesome. Look forward to seeing many of you in there. All right, let's dive in. So I'm going to start with PA Semi.

which was funny when we were chatting about preparing for the show. Ben was like, oh yeah, weren't they like based in Israel or something? I was like, I don't think so. And then I looked it up and it turns out that PA Semi, it was founded in 2003 and it was originally called Palo Alto Semiconductor. But then like right after they were founded, they moved to Santa Clara. So rather than changing the name, they just decided to go by PA Semi because they were no longer in Palo Alto, but right down the street. So the founder of the original Palo Alto Semiconductor was actually kind of a celebrity in the chip design industry called Dan Dauberful.

I hope I'm pronouncing that right. But he had been a lead chip designer way back in the 70s and 80s for DEC and had become kind of a celebrity in the field. He actually wrote a leading textbook that talked about chip design that was used at colleges all across the country. And he worked on first on the DEC Alpha chip while he was there in the 70s and 80s. And then he got involved in the ARM world and built DEC's, built the team actually in, moved to California and built the team in California for DEC that made the strong ARM processors, which were sort of higher.

powered versions of processors based on the ARM chipset. And they tried to commercialize it and thought maybe, you know, sort of mobile devices might be an application for this. This was in the mid 90s. Couldn't make it work. They end up selling the whole division to Intel. Dan goes with it to Intel. And then that becomes the X scale chip at Intel, which would power a lot of the BlackBerrys that RIM was putting out in the late 90s and early 2000s, which was kind of cool.

Yeah. Do you think we should take a minute just to, for less, you know, this is an extremely technical episode for folks not in the semiconductor world. Which includes Ben and me. Yeah, right. That's a great thing to start off with. Should we sort of explain the difference between ARM and x86, at least at a high level? Yeah, yeah, yeah. Let's do that at a high level. Why don't you go ahead and also good.

Disclaimer here that Ben and I are sort of playing experts on TV here about the semiconductor industry, but I'm sure we're going to miss a lot of stuff. So listeners, if you know about semis, jump in the Slack or email us and tell us what we got wrong, and we'll correct ourselves on the following show. Yeah, so without getting too into the details, typically computers, as we know, the desktop computers, laptops, and... servers use x86 architecture from Intel. And there were efforts made kind of starting, or at least most popularized by ARM, ARM, to do a different chip architecture with a different instruction set of assembly language that was more restricted, but a lot lower power. And Intel has had attempts over the years to come up with lower power chips. The Atom processor is a great example of this. But the reason why ARM chips in our iPhones, iPads, and many other things have come to be extremely popular in the last few years is because as we move to mobile devices, we have stricter power requirements when we cannot plug things into the wall.

Yeah, and we'll get into this in a minute when we actually get into PA Semi, but that's exactly what Dan became known for, Dan Dabberfull, as sort of an expert on pushing the limits of this power to performance trade-off in chip design. But but so this first strong arm, you know, it's kind of too early for the market in this. And so he leaves Intel in the late 90s and actually found another company before starting PA Semi. And that's a company called Cybite. And Cybite is focused on making chips for this is sort of like, you know, the run up of the Internet bubble, making chips for routers and networking gear, because everybody's these are like the three calm days. And everybody's obsessed with the build out of Internet infrastructure. So the big market for chips is actually in Cisco three calm routers.

And SciByte hits the timing exactly right for the market, ends up getting acquired by Broadcom, the big chip company, public chip company, before they even released their product for over $2 billion in late 2000. Talk about being in the right place at the right time. And this is great. This is where Dan's textbook, it turns out, helps in this acquisition because the CEO of Broadcom gave a quote to the Wall Street Journal about the acquisition. It said, if he first came across Mr. Dauberville in college when he studied the engineer's textbook on processor design, and he quotes and he says, SciByte has the best engineering team he's ever seen.

So there you go, write a textbook, get acquired for $2 billion. It's that simple. So Dan stays at Broadcom after the acquisition for a couple years. But late 2003, he sort of sees mobile coming. He's ready to leave and try the low power, start a company to do low power chips again.

And he starts Palo Alto Semiconductor. And they end up raising money right out of the gate and then through a couple rounds from Bessemer, Venrock, Highland. And then later on, Texas Instruments actually invest a lot of money in the company. And they're working on these sort of like very low power, but combined with high performance chips. But they're initially using the power instruction set architecture, which is, as Ben was mentioning, x86 and ARM. That's a third instruction set that folks might remember was initially used by Max before Steve Jobs made the famous announcement that Max were going to switch to Intel.

Yeah, which, you know, this all happened at sort of an interesting confluence of time where that was announced, I believe, in 2005 on stage at Macworld, the first Mac submerged in 2006. And then in 2007, they were fully moved over to Intel. Yeah, so it was WWDC 2005 when Steve announces that the Mac had had this secret life for the last 10 years. And this was actually coming out of the next acquisition, that the Mac operating system in secret had been able to run on Intel chips so that Apple would be able to switch over to Intel at any point if it felt it needed to for strategic reasons. such a good dramatic jobsy and reveal the fact that the last two versions or at least one version of macOS 10 had actually shipped with these universal binaries to or the ability to run universal binaries on x86 architecture or the the power pc architecture and he pulled up you know images of the cds that are in people's homes on their computers and said you actually have this right now we've just disabled it yeah super cool such a steve jobs moment and like who else but steve jobs i mean like ben and i geek out about all this history but i bet a lot of listeners are like

you know, instruction set, like chip architecture. Like, this is not why I buy products. But, you know, when Steve made this announcement, this was like national news. Everybody was floored. Like, who else but Steve Jobs could make switching chipset architectures into such a huge announcement? Well, and yeah, it's, you know, very similar to the time when Bill Gates came on that gigantic screen to WWDC and addressed the group. This was marking the enemy, like Apple embracing the enemy. They had demonized Intel for so long and, you know, grouped them into the IBM, Microsoft group of...

evil companies that did not represent the interests of Mac users and the creative professional in the future. And here they were basically signing a truce on stage. Yeah. And this is directly related to the history of PA Semi and their interactions with Apple because... PA Semi, it turns out, had actually been working with Apple for several months up before this announcement, and they had no idea it was coming. So when Dan and the company, they were targeting the embedded market and low-power devices and mobile, they weren't actually thinking about smartphones, because smartphones didn't really exist yet. They were thinking about ultra-portable laptops. And so they had been working with Apple behind the scenes, trying to bid for the contract to be the main provider of chips for the next set of MacBooks. And they were convinced that they were going to win this contract from Apple, and this was going to be huge and make the company.

And then WWDC rolls around. Steve goes on stage and makes this announcement they're switching to Intel. And apparently Dan and the company were just floored and completely furious because this blew up the deal that they were working on that they thought was going to make the company. Wow. So at this point, this was 2005. Apple doesn't end up acquiring PA Semi until 2008. After the launch of the iPhone. After the launch of the iPhone, right. And the iPhone isn't going to debut for another two years. And a lot of people think PA Semi is kind of left for dead at this point. They have this incredible technology. It really was kind of a 10x. We talk in BC and startups about you need a 10x better product to really be disruptive in the market. And their technology really was 10x better on power savings. But they were targeting the power PC architecture.

And that market just wasn't there, especially with Apple switching over to Intel. So PSMI kind of bumps along. They eventually do release a processor, 64-bit dual-core processor, huge power savings, comes out in 2007, but there's not a big market for it. That was the only product they ever released, right? Yep, that's the only, I believe that was the only chip they ever released into the market. But then at the same time, the iPhone comes out. And the iPhone initially, folks might remember the first few versions of the iPhone, the original one, the 3G and the 3GS.

all used Samsung processors. And so for a whole bunch of reasons, Apple is really interested in moving away from Samsung processors. And then in 2008, they end up acquiring PA Semi for $278 million in cash, which is a decent outcome, but the company raised $86 million. We don't know at what valuation, but it must have been. at least somewhere in the mid-100 million. So not a huge outcome for investors. And certainly relative to Dan's previous company, Saibite, that's an order of magnitude smaller. Yeah, and it's worth taking a quick pause here, that 86 million figure. You might think, how could a company of 150 employees that was around for four years that needs to design and manufacture microprocessors and systems on a chip, or I guess just microprocessors, how could they only raise that much money? And it's because they were a fabulous chip company. They were not actually making these things themselves.

What most people do is they use a chip fab in China or somewhere else with less expensive labor costs to manufacture the chips. And they themselves are designing the architecture and laying out the board. And actually, there was a lot of speculation when Texas Instruments invested in PA Semi that their fabrication plans, because TI has their own chip fabs, would be used to manufacture those processors. So that was kind of a big strategic investor for them. Yeah, totally. And what's funny, though, when the acquisition happens, and I was going back and rereading some of the articles about the deal when it came out. I don't know, Ben, you saw the same things.

Most people didn't really realize that this was about the iPhone because this is 2008. And I believe the 3G had come out at this point, not yet the 3GS, but the iPhone was still pretty small. Like it was very, you know, it had a lot of buzz, but people didn't really realize yet that, you know, the iPhone was about to become Apple and that the Mac was going to take a backseat. You know, people are still thinking about the iPod as being, you know, it was still, I believe at that point, I'm not sure, but roughly the same size or bigger than the iPhone. You know, and so all the press at the time of the deal was, they were really confused about like, why is Apple finally buying PA Semi? They switched to Intel. Are they thinking about, you know, a new ultra portable that they're bringing out that they might bring back the power PC architecture? Well, I mean, it is interesting. I'd love to get your take on this. Like what, I mean, they were clearly brilliant people there that were specifically brilliant at chip design, but you know, they weren't working on ARM processors. No, but what did happen is...

right away, they basically stopped all the work that PASMI was doing on their own stuff. And they put the team on. Apple already had an existing project working on an ARM design, working on what would become the A4, the first Apple chip that they would put out, which actually launched with the iPad when the original iPad was introduced. This was a big selling point. And the whole team from PASMI got put on that. And of course, Dan is sort of this legend in low power performance trade-off. So they really accelerated the work. Yeah, good point. So yeah, 2010, Steve Jobs.

introduces the original ipad it was really fun doing the research going back watching that keynote and watching the product introduction video scott forestall takes up like half of the video of the product video which is pretty funny yeah poor poor guy and all the uh all the apps like so much you know skeuomorphic design it was it was actually sort of painful to look at yeah yeah i bet it's it's weird how so like you know the lickability was a thing at the time in ui and you wanted to like touch it and now it's just like it's a whole bunch of wasted rendering Yeah. Total sidebar too. I kept thinking, you know, this was 2010 when it launched and looking at this, you know, we're here in January, 2017, which we talked about theme on the show that, um, things move really fast in tech and waves keep coming successively faster, but like that was not that long ago. And both the software and the hardware of the original iPad, you know, Steve and Johnny Ive and everybody is touting it as so incredibly advanced at the product launch. And now it looks like a dinosaur. Right. And it was at the time. I mean, I, I, uh, I had the first iPad and I remember thinking this thing is like,

a marvel but knowing even then that this one would be known as the heavy one like it was you really couldn't hold it out in front of you with one hand for any meaningful amount of time without your arm getting tired yeah and uh you know i had it too i bought it on launch day and lined up for it it was uh it was great i used it so much but now you know now i've got my iphone 7 plus i don't have an ipad anymore and it's like ways you know has almost as much screen real estate maybe not almost a significant enough screen real estate and weighs almost nothing and battery lasts forever amazing how technology moves All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. So, David, here's a question that I do not think most enterprise CIOs or CEOs could actually answer today if they were asked. How many agents actually run inside your business? Yes, I don't think anybody really knows. And of course, then there's the harder questions like what can they access and who gave them that access? And is any of this paying for itself? ServiceNow has an answer to all those questions. The super intelligence control tower.

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So that's the story of PSMI. The Authentech story, we'll run through a little more quickly because it's less interesting in whole, but it's sort of new. We haven't seen something quite like this yet on Acquired, I think. Authentech was based in the... technology hotbed of melbourne florida which i did not know until i started doing the research here but there is um i believe the largest employer in melbourne is a company called harris um which is a giant uh defense contractor and it was actually named by wire the things you learned during doing research for this show named by wire magazine as the number two threat to internet privacy in america in 2015 right behind the nsa um they make uh the main product i believe that harris makes now are um what are they called I want to say Stingray, that could be wrong. They're basically like fake cell phone towers that your phone will try to connect to. And then through that, you know, the government or whoever there owns these things and can track phones, huge privacy controversy around this company. But they, they had in the 90s, they had a big semiconductor division. And they kind of went through must have gone through a strategic review and decided that they were gonna

change that part of their corporate structure. They end up spinning off the entire semiconductor division in 1999. But right before they do that in 1998, they spin off this company called Authentec. And Authentec was going to work on specific security and authentication technology for embedded devices. And this was back in 1998. So way before smartphones are even a concept. And there's actually this really great article that we'll link to in the show notes of the CEO of Authentec.

is after the Apple acquisition, he goes back and he gives a talk at, I believe, NC State, which was his alma mater. And he brings one of the prototypes of Authentic's first product, which is basically the Touch ID sensor that's in the iPhone. But it's like many times larger than an iPhone itself. Now it's this huge box with like a separate box attached by a big ribbon cable that you stick your hand on and it like worked, you know, 5% of the time. To draw an analogy, it sure reminds me of playing with an Oculus in 2016, 2017. Yeah, definitely.

So Authentic works on this technology for a long time. They actually go public themselves in 2007. We keep refining the technology and selling it to any customers along the way in applications that would find it interesting. And then finally, in 2011, they do sort of a collaboration with NXP Semiconductors and a software firm called Device Fidelity that was working on mobile payment software. And they sort of like create this suite of both hardware and software that's aimed to enable...

fingerprint authentication for NFC mobile payments for the Android ecosystem. So this was kind of the age of when everybody was all excited about NFC. This was a big selling point for a lot of Android phone manufacturers. And so this consortium actually wins contracts with Motorola, Nokia, and then finally with Samsung. And this was going to be a huge deal. Samsung was going to put this system in their coming flagship phones. It was July 2012, beginning of July 2012, when Samsung announces that they're going to integrate this technology in their new set of phones.

almost immediately thereafter late july 2012 on july 27th apple acquires the company hey which was a big coup i mean we've talked about on the android episode and a bunch of episodes in the past you know this was like the height of the smartphone wars samsung had emerged with copying apple you know feature for feature and this was going to be a big innovative thing that samsung was going to launch apple sweeps in and acquires the company and it's interesting that uh i remember hearing about this when it happened and looking it up and going oh fingerprint recognition and kind of being like well maybe they'll do that on max at some point or the iphone at some point but the thing that totally got lost in that story was the payment stuff And it's funny that, you know, with Apple Pay becoming one of the major advantages to having Touch ID, that, you know, that had its roots all the way back in Authentic. Yeah. And, you know, more than a decade before. And it's pretty amazing. I mean, that time and that amount of R&D over a decade plus that had gone into this product, I think really did make it differentiated in the market because, you know, Apple acquires the company end of July 2012. And it's just almost exactly a year later.

When they announced they were acquiring the company end of July 2012, the acquisition probably doesn't close for another couple months at least because Authentic's a public company at this point. And it was beginning of September 2013, the very next year, when the iPhone 5S comes out that has the Touch ID sensor. So the turnaround time on this is basically immediate in terms of product development when you're integrating an acquisition. So this was an incredibly speedy job by the Apple team. And it speaks to the maturity of the product. Totally.

Totally. And I've got a couple of interesting tidbits here. I went to the Wayback Machine on archive.org and looked up Authentic from February 22, 2011. And you look at their website, and it really is the whole suite of very un-Apple-like authentication methods from that era. There's like a little banner, and we can include this link in the show notes. There's a little banner there that says, does your PC have a touch sensor? And it's got that little swipe down thing that's on a lot of the PCs to log in. There's an ad for the HP Simple Pass 2011 powered by Authentic's identity management system. There's this laptop that comes with it.

garbage product names. Yeah, totally. Totally. And you look at this and the kind of high level here, the high level point I'm trying to make is this company looks nothing like an Apple company. It's kind of the antithesis from a go-to-market and product perspective of the way that Apple reaches customers. I mean, they have like eight other companies' logos all over this website. And their quote, let me pull up the Steve Dowling quote.

you know, that they always give when they acquire a company is Apple buys smaller technology companies from time to time. And we generally do not comment on our purposes and plans. And that's truly how they look at it, that, you know, we're buying a technology here. Like we could not care about the way that they're going to market right now, the way that their products look or are defined. It's literally like, look at all this R&D these people have done. We're buying a technology company. Yeah. Well, I think this is a perfect transition unless you have anything else to go into acquisition category. I do have a couple, a couple little things. Okay, go ahead. One on the show, as listeners know, we love when public companies acquire other public companies because we get to learn things.

Apple paid a 58% premium for Authentech over their existing or their current trading market cap. And a lot of this was powered because Samsung was one of its biggest customers and believed to be also making a play. So I don't believe there was a counter offer, but Apple did go in high to make sure that they got the deal. We've seen in other episodes where we've reviewed public companies buying other public companies. You see 18 to 30% as the premium that existing management teams and boards are willing to accept as a...

acquisition bid. And this is dramatically higher than other ones we've seen. And it did come with a termination fee of $20 million in case there were antitrust issues and the deal didn't close. Yeah, it's interesting, though. I mean, the sticker price was $356 million, which I don't think we mentioned earlier, we should have. So yeah, that was at that almost 60% premium, $356 million. When you take a step back, that's a large premium, but that's not that much money. And it's interesting that Samsung either didn't counter offer, or if they did, not buy enough to win the deal.

For, you know, when you're talking about not that much money relative to the amount of what we'll get into this in grading, grading the show, but the amount of money in the smartphone, you know, hardware sales for a really differentiating feature like this. Interesting move by Samsung not to let this one go, especially they just announced earlier that month, this big deal that they were going to include this as a flagship feature in future smartphones. Yep. Yep. And then before we move on to, it's worth noting, you know, we're covering two very big landmark deals here, but Apple spent over half a billion dollars after.

after acquiring PA Semi on other, you know, semiconductor and process related companies. Intrinsity, Passive, Semiconductors, PrimeSense. They really, you know, it wasn't just that they developed it wholly in-house then after acquiring PA Semi. Yep, yep. Definitely. And did they acquire other authentication companies along the way too? I'm actually not sure. I think smaller ones, but this was definitely the, you know, you look at an iPhone, you identify it has a screen and a button with a fingerprint sensor and this was the fingerprint sensor. This was the main tech behind it. Yeah. All right. Acquisition category. Let's do it. Let's do it. So yeah, Ben, what you were saying earlier, what I think is interesting about these two deals is they are both of them very directly related to flagship features of iOS devices, both iPhones and iPads.

that would become differentiators in the market. So they make sense to do together as one episode in that sense. But I actually think they are two different categories based on the history of how the integration happened. You know, with PA Semi, clearly like Apple was already working on their own ARM chips that they would release with the iPad. But this was about getting sort of the best talent in the world to come and join the team and execute with them. And then on the authentic side, so I think the PA Semi acquisition was very much a...

people acquisition, very technically minded people. That's only 1.8 million per employee. I mean, it's actually not like insane if you think that if you are Apple making the bet that this is going to have tremendous business impact and there's not other people of this caliber. I mean, this is literally the guy that wrote the book on low power, high performance chip design. But then Authentech is interesting. This is a company that was a spin out from a defense contractor based in Melbourne, Florida. And I believe most of the people from the Authentech acquisition are no longer at Apple or if they are perhaps a move to Cupertino. That was very clearly a specific technology in the fingerprint sensor that became Touch ID that they acquired. So they both accomplished the same goal, but it's interesting. I think they took very different routes in each acquisition. Yep. David, I couldn't agree with you more. That's exactly what I had in my notes. And I want to just make a...

Drilling a little bit further on one point that you made that of why it makes sense to do these these two companies together the The ability of Apple to integrate these two products creates an advantage that other manufacturers don't have. So the A-Series chip has something that Apple markets as the secure enclave, which means that it has the ability to do processing specifically of security applications in an isolated way from other things going on the chip itself. Yeah, and importantly, locally on the device. Yes, yes. So when you do your Touch ID fingerprint, not only does it not round trip to the server, it doesn't get to memory, and it doesn't even get to the main CPU, or I guess the main core of the processor. So the Touch ID sensor operates fully in an isolated way, and we've seen that really pay dividends for Apple going toe-to-toe with the FBI. Yeah, in a San Bernardino shooting case. Yeah, and I think when Apple plants a flag in the ground and says we're serious about device security, and I don't want to get into the morality and politics of that, because I think that's a different discussion, but they really are able to say that...

you know, uh, all the security vectors that, um, that people would normally do to get into devices by, you know, rooting it or having direct, uh, direct hardware access. Like you just, those fingerprints and you know, the, the, um, you know, ghosts in, in memory of those fingerprints don't even ever exist to, to be able to go and get them later. So I think that the integration of these two technologies is, is something that, uh, as, as Tim Cook would put it, quote unquote, only Apple, uh, would be able to take this approach. Yeah. And this is, well, this is definitely going to be one of my tech themes, which we can, we can talk a little bit more about later, but I'm thinking back to the next episode and.

Steve Jobs, you know, quoting that if you're really serious about software, you need to make your own hardware. Which I think he ripped off an Alan Kay, right? Yes, exactly. Exactly. And he attributed the quote to Alan Kay when he said it. But, you know, classic case of that here. And it really is. I mean, no, this is a key differentiator of the iOS ecosystem and devices now for a lot of people, especially in the, you know, in the post-privacy, post-truth world we live in, that no other, you know, the Android ecosystem can't make these claims. No other device manufacturer can.

Um, also I find it incredibly ironic that authentic is a spin out from a major defense contractor ranked by wired magazine is right behind the NSA in terms of, you know, decreasing privacy on the internet and then becomes a cornerstone of Apple's privacy strategy. Yeah. The irony is thick. It is thick. All right, listeners, now is a great time to talk about one of our favorite companies, Lagora, the agentic operating system for legal work. Yes, most of you have dropped a contract into a chatbot by now. But as a lawyer, how far can that really take you? It's never seen your firm's precedents. It doesn't respect confidentiality. And you can't check where its answer came from.

So Lagora's founders approach this the way that great founders do. Early on, the team moved into the office of a big law firm in Stockholm and learned, for months, how the work actually gets done. A couple of thousands of enterprise customers and 100,000 users later, they still work that way. They employ 100 legal engineers on staff. These are lawyers sitting inside of firms and legal departments to deploy Lagora onto live situations like the deal closing this week or the policy review due Friday. The product has gotten very powerful in a short period of time. A year ago, the goal was a good answer from a chatbot.

With the Legora agent, you hand it the work and it comes back with a plan. Tasks like running diligence on a data room or reviewing a new vendor contract get completed inside the tool you use every day, like Microsoft Word, and against your own precedents and playbooks. Every finding is sourced, the lawyer directs the work and signs off before the system executes any steps. Every legal team can get access to the same AI models, so the models themselves do not give you an edge. What you can do with your own data, people, playbooks, that's the whole game.

Today, over 100,000 legal professionals at more than 1,800 law firms and in-house legal teams in over 50 markets use Legora. And when Legora goes head-to-head with its top competitor and a pilot, it wins 70% of the time. A demo is one thing, but what matters most is an associate who reaches for it at 2 in the morning during a closing or whether a general counsel trusts what it says before the board meeting. So if your legal team wants to check it out, whether you're at a firm or in-house, go to legora.com slash acquired and be sure to tell them that Ben and David sent you. All right. So we move on to what would happen otherwise. Yeah. And I think one thing that I want to raise now but not talk about until we're grading it is I talked about this, you know, Tim Cook marketing speak only Apple and the advantage that, you know, these two technologies combined together under the same roof and the same engineering team give. I think it's interesting for us later to examine what was the actual business impact of that. Yeah.

What would have happened otherwise? You know, I have two sort of notes here. One is who else could Apple have bought or how else could Apple have gotten here? And let's look at PA Semi first. It was basically a build or buy decision for Apple. And clearly they were working on building anyway, but this just rapidly, rapidly accelerated their pace.

And then with Authentic, you know, it truly was competitive. Like Samsung was very clearly skating in the same place and they were already, Authentic was already sort of in the Android ecosystem. So it wouldn't have surprised me if somebody in the Android ecosystem that was budding and becoming the, at this point, I think it was kind of overtaking Apple and becoming the more popular, not the more profitable, but the more popular operating system. And I could see that one going to a different company. And then the question for Apple is, you know, how would they have been able to build out the feature that they wanted to build without bringing Authentic in-house? Yep, spot on. And I think this whole,

that discussion, especially Samsung's... failure to either submit a competitive bid for Authentech or a compelling one, I think just really reflects the difference in perspective about products at Apple versus many of their competitors in the ecosystem. You know, Apple really say what you will about them. And I think as we move further into the maturing phase of mobile devices and people start to look to the next generation, there are a lot of legitimate questions about Apple's future right now. But they really think about products from a whole product sense.

and from a user-centric and compellingness to a user perspective. And they realized that they had a vision of what this integrated product that we were just talking about, you know, about not only the convenience of unlocking your phone and paying with your fingerprint for mobile devices, but the security and the necessity of doing that with in-house technologies versus their competitors in the Android ecosystem. And, you know, I really don't think any of them can make the same claims around both security and privacy and also seamlessness that Apple can in this arena. Nope. Totally agreed. There's one other thing. I just, I don't think it's insightful. I just find it hilarious that in 2008 CNET wrote this article that was.

pointing out that Apple made a choice here with ARM with the iPhone, and yet Intel, their partner for all their Mac computers, had a low-power chip they were developing called the Atom. And they read this whole article analyzing why it seems like Apple's not going to go with the Atom chip, but the title of the article is Apple Unlikely to Get Up in Atom. And I just read it and was like, boo! That's like a dad joke if I ever heard one. All right, tech themes? Tech themes. You know, I don't know if this was apparent to them at the time, but when you look at the proliferation of...

applications that Apple has been able to go into with first-party hardware that they never would have dreamed of 10 years ago, it's incredible. And it's all powered by the work that they did on the A-series chips. So we look at the Apple Watch, which has the S2 chip, which is the system, they call it the system in a package. So not just the system on a chip, but they actually package other sensors with it. The EarPods have custom silicon, the W1 chip. The Touch Bar has the T1, which basically is a forked version of watchOS that it runs and has a similar architecture.

It's incredible that Apple's been able to so finely tune their products because they've been able to control the underlying chip and surrounding pieces of that rather than buying it from a third party. And Apple, we view as a vertically integrated company, and they're modular in so many ways. They have tons of suppliers. They negotiate fiercely. They combine hundreds of other companies' products into their own and then put a nice case on it. But for the things that they think can really differentiate them and really provide a strategic advantage for the long term.

They bring it in-house. And doing that with the silicon and vertically integrating the silicon into all their products really enabled all these new product categories that they're trying to go after today. And I don't think any of them will be as successful or profitable as the iPhone. I think that was a unique moment in history, but it sure is allowing them to go new places. Yeah. This was one of my two that talked about this idea that if you care about software, you make your own hardware, the L&K concept. But I think it's... I wanted to talk about it in the lens of there are very, very few technology companies that really take that to heart. And they tend to be...

the giant most successful enduring companies that do, you know, the Apple, you know, Google with what they're doing with their data centers and with, you know, and it's like one level of the stack with TensorFlow and all the machine learning, you know, tools and technology they're creating. Amazon, certainly with Amazon Web Services. And I think, you know, that balance, if you really want to build an enormous and sustaining technology franchise, you know, certainly Microsoft does this too. uh, and Facebook is beginning to, um, you have to make that transition, but you can't do that as a startup, right? Like it would be a fool. You know, um, Xiaomi tried. Yeah. Well, right. And, uh, and, uh, they are, you know, at this moment in time, I think, I think struggling a little bit relative to expectations, but you know, like Baidu does the same thing, Alibaba, but you know, the question of when to make that transition in the life cycle of the company.

is an important strategic one. Certainly, I don't think I would recommend baby startups doing it. You know, as a startup, you want to embrace standing on the shoulders of giants. But at some point, if you really want to compete with the big boys, you kind of have to become a giant yourself. That's true. That's true. Another interesting data point on this. So according to Geekbench, and this is from a Verge article we can link to, called the iPhone 7 810 Fusion Processor and Intel's Future.

The single core performance of Apple's latest generation of smartphone processors, the A10 Fusion, has basically caught up with Intel's laptop CPUs and actually rivals the single core performance of the Mac Pro. I mean, albeit a few years old, but the single core performance of the chip in my phone is rivaling Intel's laptop chips. And of course, there's all sorts of advantages to being a tower. You can put in GPUs and as much RAM as you want and a lot more complexity without having to worry about storage. But the market for that high-end power is shrinking.

or the market for low power chips is growing dramatically. It has grown dramatically. What I think, I mean, I've found since upgrading to the 7 Plus, I had the 6 Plus, not the S, the sort of two, two and a half year old model at this point before upgrading. Like I've noticed a dramatic difference in performance. Yeah, yeah. If we really want to go tech trends and themes, how much does all this matter going forward? It's clearly been super important in the last decade to have all this power on our phones. But are we going to shift back to our...

the TikTok of, you know, powerful on the client, powerful on the server, powerful on the client, powerful on the server. Like in this world of cloud and machine learning and relying on a lot of remote infrastructure for our computing, is this going to be less of a competitive differentiator? And, you know, how much does this world of our matter in the land of machine learning and cloud? Yeah, 100%. There's actually two other tech themes I wanted to lump together and cover quickly. This sort of, I don't think answering that question, but furthering the context for it, you know, one is sort of.

market timing and waves. And I think, you know, the PSMI history illustrates this so perfectly, right? You know, like, and we talk about on the show so often, we covered in our 2016 review episode, you know, the key to startup and venture capital is, you know, targeting the big market at the right time, and the right time of the wave. And, you know, Apple with the iPhone just got it so, you know, so right, probably the most right of any, you know, sort of combination of size and timing of waves in history with the smartphone market, like technology had just gotten to the point and consumer willingness to adopt had just gotten to the point where it was possible, you know, the first processor in the first iphone was like a i think it was 416 megahertz i believe from samsung and like it was just barely enough to make the thing work you know but it was just barely enough and uh and but but now as the product as the market has matured and we've got you know a chip in our iphones that literally is as powerful as a mac pro a couple years ago how much more power do we need you know we're out of mature point uh at least maturing point in the smartphone market and then the other theme i wanted to tie that to is just like both of these acquisitions are total clayton christensen sustaining innovations not disruptive innovations you know they are sustaining this wave that apple's on but but as you pointed out with your question the critical question for the tech industry for us as investors at startups as people working in it right now is what is the next wave you know um because the this past wave that we've been riding of mobile and smartphones while being the largest and most prolific in history um you know it's mature now

Yeah. And the title of that book and the phrase, what got you here won't get you there, starts to come to mind where we're going to get into grading here in a minute. But having their own in-house silicon and to the lesser extent security features gave Apple a lot of advantages to keep their experience lead over Samsung and other Android manufacturers and to really be able to produce the best quality, most differentiated experience phones. And I think that was hundreds of billions of dollars in revenue that we can attribute to that. But looking around as the dust starts to settle today and looking at what's next, I am not convinced it actually sets Apple up for the future in a way that matters in the next wave of experiences. Yep.

I completely agree, especially if the next wave of experiences are primarily machine learning-driven, data and data science-driven, and most importantly, as a result of that, service-driven innovations. Not hardware, not software, but service-driven innovations. That is not in Apple's DNA. No, it's not. I forget what they called it. What's the thing where they do the machine learning on the device for the photos that they touted at WWDC? Oh, I don't remember. Differential privacy? Yeah. Well, you do that. Listeners, Apple is taking the position that they can do a lot of this really advanced machine learning and cool applications that you're seeing from Google and others, that they can do it on the device. And they can do it without sending your identifiable information to the cloud and potentially compromising your security at a request in the future. And they're publishing papers on it. And they're actually using a lot of methods that were published by Google engineers years ago.

I, you know, it's interesting. I fundamentally don't think that the on-device way of doing this will win out in the long run relative to having all of your data in close proximity to each other that's not bandwidth constrained, all in, you know, data centers. Yeah, I mean, we're still in early, early innings of, you know, this wave. So we don't know. But I do tend to agree with you. I mean, to the extent that the quality of machine learning and data science is driven by the volume and the quality of data that you have.

siloing that data to just what the storage available on your local device and your own data generated from it versus, you know, a Google like approach where it's, you know, unfathomable amounts of data across the entire world, interacting with your product in real time, you know, in all their data centers across the world. You know, I think Google is going to win that. So we'll see. Google, Amazon, Microsoft, like one of these, not Apple, I don't think. I don't think so. Yeah. Differential privacy is the name of that feature. Got it. Yeah. You want to move on to grading it? I think so.

So for me, you know, this really is kind of a, as we were talking about, sort of a tale of two cities, a tale of two acquisitions, you know, was the best of acquisitions, was the worst of acquisitions for Apple. You know, on these two companies, they spent a combined $634 million. And then as Ben pointed out, they acquired many other smaller companies in the same, also in silicon design. So let's call it another half a billion-ish. Let's say they spent around a billion dollars on this, on these teams and technologies.

from the time they launched the A4 in the iPhone, which is with the iPhone 4. And let's just only look at iPhone and look at the generations from iPhone 4 to iPhone 6. So not the 6S, not the most recent 7. You know, it's roughly four-ish years. And let's just say as a proxy that that's sort of the competitive advantage period granted by these acquisitions and the speed with which they were able to deploy these differentiating features versus the market. Just those generations of iPhones sold about 720 million-ish units at roughly a $600 average selling price. It's a little higher. So that's...

over 400 billion dollars of revenue and let's assume about 40 ish percent gross margin it's actually a little higher you know you're at sort of 170 billion dollars of gross margin generated by units during that time and then so you know trying to do the math here like okay how much of that is attributable how much of those sales are attributable to these differentiated features i don't know 10 5 let's take 5 that's still almost 10 billion dollars in incremental sort of contribution margin from these acquisitions so versus a billion dollars spent 10 to 1 you know that's great um At the same time, these are, as we just talked about, sustaining acquisitions. I compare them versus our benchmarks of what great acquisitions are in Instagram and in Next. Those are acquisitions that generated entirely new business lines and categories for their companies. In Next's case, over a trillion dollars worth of business. I don't think those fall into that category. So for me, I think I give a B plus slash A minus with a...

leaning more towards the A- side because these were incredibly executed, sustaining innovation acquisitions. And had they fallen into competitors' hands, I think would have changed, impacted the trajectory of Apple's profits versus the competition in this space. Man, David, this is why I love having you as a co-host. Because you had done the same math and we're about to do the same thing and I just stole your thunder? No, because I didn't do the math and I had this like, I was going to arrive at an A- conclusion through a much more hand-wavy method, but the actual analysis to come up with that $10 billion compared to $600-ish million, it's a 16, 17x return. And using all sorts of assumptions and sort of generalities in that model, but I totally, here's going to be my A-minus. They made hundreds of billions of dollars of revenue, some amount of that attributable to these acquisitions.

was tremendous for them getting here, but didn't set them up going forward. So I was going to discount my A to an A- for not being convinced that it meaningfully differentiated them in the future. Yeah. Well, I think we probably both, you know, together, we're both at the right combination of like database analysis and big picture gut feel here. And I think you're totally, like, I just can't, these were incredibly well-executed acquisitions, but I just can't put them in the same league as Instagram and Nest. Nest, not Nest, Next.

We'll have to do Nest at some point. I just bought one. I actually really like it. But anyway. Yeah. And, you know, the counter argument, I'm going to stick with my grade, but the counter argument would be that let's say we move to a world where there's not all this heavy compute going on in the phones. And we, rather than having a single device, we have this networked confluence of sensors around us. We have ear pods and we have a watch and we have a screen, but it may not have the, you know, all the innards of the iPhone in it. And maybe that screen just appears in our glasses or it appears wherever we're looking or, you know, there's all sorts of interesting sci-fi features about what the display could be like. But let's say we decouple all these things.

Even though a lot of that intelligence is going to be done in the cloud, we still live in a world that's more bandwidth constrained than it is compute constrained or storage constrained. And I think that as bandwidth continues to be the issue, that's going to be the gating factor in how much we can push off of our bodies versus actually have with us at all times. And Apple bringing all of this silicon design and production in-house, or at least designed in-house, does allow them to create the best possible. experience of this several device ecosystem talking to each other, as we've seen with the EarPods providing a meaningfully better experience than pairing most Bluetooth headphones. Yep, I completely agree. And I think that, you know, the truth lies somewhere in the middle. And the reality is, you know, as we talked about, we are still, this is what makes, you know, our jobs fun and technology as an industry fun. Like, we're still early enough in the next wave or waves, you know, whatever they will be, whether it's...

you know, machine learning driven services or sensor and very intimately personal device driven technologies. But we're still early enough to that these stories haven't been written yet. And these waves come so fast in technology that, you know, both of us have been in this industry less than 10 years, and we've already experienced, you know, multiple waves. So it keeps it fun. Yep. Yep. All right. Moving on to follow up. Yeah, we got we got three things. So we covered in our first non technical episode, the merger of Alaska Airlines and Virgin and Virgin America. And I sent David a picture recently of I was flying back from vacation had a

little insert in my Alaska seat in front of me. And they really, really, really embraced messaging to all of their, their customers that they're merging in the seat back pocket. There's little information things. All the flight attendants were wearing these like really well-designed shirts that blend the Virgin brand into the Alaska brand and extremely informative information on how all the, all the point stuff gets, gets combined. And so I think they're, they're just rolling that out now to combine all of their loyalty programs. Yeah. Yeah. Yeah.

As a self-proclaimed, quote, West Coast resident, Jenny and I, we hardly think of ourselves as living in one city and more just up and down the West Coast at this point. And I'm so excited. I think this is taking the great Seattle service that Alaska has and virgin from SFO and LAX and Oakland. Super excited to merge these point programs and keep getting. incremental status tiers. Absolutely. Number two, Mark Lurie is starting to make moves at Walmart. They just had a big reorg, created new positions, eliminated others. One thing that we talked about in the Jet episode was if they're going to be serious about rebuilding their organization as a true internet company at Walmart, and if they're going to sort of be able to move that almost reverse acquired DNA of Jet and kind of like infuse that in Walmart. And we're starting to really see the first steps now.

Yeah. News just came out in a memo from Mark Laurie, basically reorging most of the e-commerce operations at walmart.com. And unsurprisingly, it's mostly Jet folks who are taking over. And I think we talked about this on the Jet episode, but just even more firmly positions this as sort of a very, very expensive talent acquisition that Walmart did. Yeah. And it's interesting how, it's funny how the price tag actually may make it command more respect internally. Like if they had bought it for $1 billion, you could see.

like people inside being like, eh, we don't have to listen to this guy. But with like a more expensive price tag comes a more necessary adherence. Man, that is some dysfunctional organizational behavior as they would put it in business school. But I actually, I can totally see that being true. Yeah. And then one other thing that's kind of a tech theme we can pull out of this is when we originally started doing the show, it was for David and I to understand why successful acquisitions went well. What were the characteristics? And as we started companies in the future that would, if not IPO, hopefully sell to larger companies, how to make those more successful within the company.

One thing that we immediately identify that Facebook does very well is this keep the team separate mantra, where you let teams exist on their own for a long time. This is a big part of change management, just sort of like message what's changing, message what's not, and allow the good things to continue for as long as possible from the smaller organization. A second big one that we're now seeing that I think we saw first in the accompli episode where Javier Saltero took the lead for all of Outlook at Microsoft is when you acquire the company, promote their leader to be the leader of the organization that they're coming into and allow all the goodness from the company that you acquired to actually, you know. grow in that much larger tree of the organization chart rather than existing just down in their little thing. Yep. Well, I think it really depends on what the acquiring organization's sort of goals and needs and realities are. Facebook can take the luxury with a lot of their acquisitions of letting them...

you know, flourish and operate on their own because the core Facebook business at this point, you know, we talked about on the IPO episode at one point it was quite challenged, but you know, at this point it's doing so well versus a Walmart where, you know, they're just battening down the hatches versus, versus Amazon. And, you know, I got to think if I'm at Walmart right now and I see Amazon go Amazon prime air and drone deliveries, like I've got to be just terrified of what that's going to do to my business. You know, they don't have that luxury. Right. Right, right. Third and last follow up we wanted to do is the news to be expected. Drama is mounting around the Snap Inc IPO that is hotly expected in a few months. There was an article, a series of articles, I believe right at the end of 2016 about potential fraud at the company and overstating their growth numbers.

And the news just came out this week that, unsurprisingly, Evan Spiegel and Bobby Murphy are going to have super voting shares and control the vast majority of the voting shares of the company. This is going to make for an excellent acquired episode when the IPO finally does happen later this year. We can't wait to get all these issues at least resolved in the context of the IPO and dig in. Yep, I can't wait either. All right, with that, should we wrap up with carve-outs? Yeah. So mine, I was going to recommend a whole blog, but I want to save.

more posts on this blog for future carve-outs because there's so many good ones. There's a guy named Michael Lopp, who was a longtime engineering manager at Apple and then Pinterest, and now I believe he runs engineering at Slack. And he writes under the pseudonym RANS, and he writes at ransinrepose.com. And there's a great piece that he wrote late last year called The Situation. And it's about that situation where something bad happened at your company. You need to have a meeting about it. Everybody is sitting there in the meeting and kind of the...

all looking at each other like, oh, what's the right protocol for this? Like, who's on the line? What do we need to do? What are the steps? And it's all about the way that you feel in that moment and a really beautiful writing style and a pretty good actual means of dealing with escalation like this and understanding, you know, what are the logical steps that need to be taken in varying types of situations? So just love his writing style. Obviously, the content is super applicable for anyone in a tech or engineering organization and highly recommend it. Yeah, even beyond tech and engineering organizations, a number of...

quote unquote situations I come across on a monthly, if not weekly basis. I need to read that post. It's great. It's part of a lot of his posts are basically the pre-writing for a book called Managing Humans that he's got. So I think I haven't read the book yet. It'll probably be my carve out when I actually do read it, but I highly recommend it. It reminds me of...

Total aside, but when I came back from business school to Madrona and first started working on boards as a venture capitalist, I asked Sujal Patel, who was the founder and CEO of Isilon, who's a very successful storage company and former Madrona portfolio company in Seattle, sort of what advice he had as a successful CEO and having worked with lots of VCs, Madrona and Sequoia and many others on his board, and what advice would he give me? He said, you know, the biggest thing, just don't freak out. I've tried to take that to heart. It's like things are going to happen in any journey. And, uh, if you freak out as a board member, then you make me as a CEO freak out. And then that makes everyone else at the company freak out. And then that leads to bad decisions, you know, keep a steady hand. Cool. Cool. My carve out, uh, is a fun one. Jenny and I were staying at an Airbnb for a wedding this weekend in New York. And, um, uh, there was, uh, they had this, the host had this, this book on a bookshelf there called daily rituals. And I thought that sounds interesting. I'll pick it up and see what's in it. And, um, it's this, uh, it's this cool book. It's a,

collection of sort of one to two pages each on really famous artists and thinkers from the last couple hundred years and um just what their daily routine was like like what did they do um how did they get their work done you know how did how did they spend their time and um super interesting in the wide variety of you know some people like benjamin franklin and others like very very disciplined you know very um you know very uh regimented in their lives and you know devoted hours to work and really good health habits and those things and others are like you know voltaire voltaire like spent most of his time just lounging in bed and he would write in bed and um dictate and like you know drink cope massive amounts of alcohol and then other you know people would do all sorts of drugs and like it was the doubly interesting thing about it is you know each title of each person had their birth year and then if they were deceased their death year there seemed to be no correlation between uh longevity and and a degree of hard living you know people who were the most disciplined like would die in their 50s and people who um Led the craziest lives would live into their 90s. Like, just interesting. I'm not sure that that justifies living a crazy life. Yeah, David, what do you recommend here? Yeah. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep.

crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started.

That's it for today, guys. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. And if you feel so inclined, we'd love a review on iTunes or any sharing you could do with your friends, family, coworkers, social media, whatever you feel is appropriate. Yeah, and just a quick preview. We've got some great episodes in the works with some really special guests. So we're looking forward to the next few months here at Acquired. We also have some new stuff coming on the show and we can't wait to share it with all you guys. So that's a teaser, but stay tuned. We've got exciting stuff coming soon. Well, how about this? Join the Slack and we'll tease a little more.

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