Virgin America

For its tenth episode, Acquired breaks its own format: the deal is not a technology acquisition, but the hosts' romantic fascination with airplanes wins — Alaska Airlines acquiring Virgin America, announced in their Seattle backyard just weeks before recording (April 4, 2016). The episode is deliberately highly speculative: there's no five-year history to grade against yet, and the deal wasn't expected to close until early 2017 at the earliest, with a huge amount of regulatory review ahead (the American Airlines–US Air merger is the precedent, where the government extracted huge concessions and it almost didn't go through; a follow-up episode is teased if no joint airline exists by 2017).

Virgin America was founded in 2004 by Richard Branson but took three years of machinations to launch US service in 2007. The core obstacle: US law caps foreign ownership of domestic airlines at 25%, so Branson and Virgin had to sell off 75% of the company (to a couple of hedge funds) before they could even hope to operate — the company was even initially Virgin USA. Branson licensed the Virgin brand to the airline, meaning Virgin America didn't even own the name painted on its own planes; at various points there was talk of ditching the Virgin name entirely to speed regulatory approval. Eventually the hurdles cleared, aircraft were bought, and operations launched from a San Francisco (SFO) hub.

Things went fairly well — at minimum, Virgin America didn't die the way most startup airlines do — and it delivered real technology innovations: in 2009 it became the first airline to offer Gogo in-flight Wi-Fi ("as Louis C.K. says, it's magic"), and the hosts believe it was the first to install seat-back interactive touch screens for every passenger throughout the plane — not to mention the nightclub-inspired lighting and the purple afterglow. It went public in November 2014; about 18 months later, a bidding war erupted between Alaska — long rumored to be interested — and JetBlue. On Monday, April 4, Alaska announced a $2.6 billion agreement: a 47% premium to Virgin's prior close and roughly 80% above the price before bid rumors began.

The premium is the hosts' first red flag: with industry consolidation, the only way for an airline to compete with the big guys — United, Delta, American, and Southwest (itself the classic low-end disruption story) — is to be big, and there's a limited number of airlines left to buy. JetBlue saw the same opportunity; the result is a very inflated purchase. When the dust settles, the total enterprise value is about $4 billion including Virgin's debt and aircraft leases — an all-cash $2.6 billion purchase plus $1.4 billion of leases and debt assumed: "what a ridiculous capital-intensive, high fixed cost industry air travel is. That's four Instagrams, Ben."