Acquired - Episode 1: Pixar

Episode Date: October 15, 2015

Ben and David discuss Disney's acquisition of Pixar in 2006. Was it a success? If so, what are the criteria that made it work? What lessons can be learned for other acquisitions in the future?Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

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We've got the truth. Welcome to the first episode of Acquired. I'm Ben Gilbert. I'm David Rosenthal. And we're your hosts. We've recorded a pilot before this, but I'm not sure I'm comfortable letting that see the light of day. So this is our first real episode for the world to hear. We're going to start with a little background on ourselves. We'll talk about what the point of this podcast is, and then we'll get into the nuts and bolts of the first episode. So I guess I'll start. I'm Ben. I'm the co-founder of Pioneer Square

Labs here in Seattle, where we come up with companies and start them, prototype them, see if they work, and spin them out. I'm David. I'm a principal here at Madrona Venture Group. We're an early-stage venture capital firm in Seattle. We invest in technology startups that hopefully one day go on to be an acquirer or be an acquiree. Yeah. one day go on to be an acquirer or be an acquiree yeah so it's funny this this is um this is podcast was uh something david and i were we're thinking up well um we're out drinking and has all good podcasts start and we kind of came to the conclusion of like all right let's try and make a list of companies that have been acquired where it was actually beneficial

for the acquirer. And I think that there's so many examples of the opposite of like, boy, that was a huge write down. That was embarrassing. Or my God, that was an interesting valuation for someone that had no revenue. We'll see if it ever pans out. And I think that it's worth going back and highlighting really interesting tech companies that were acquired and ended up being kind of a one plus one equals three situation where it was actually a good investment in the future. I agree. And also interesting, perhaps what could companies operating either as startups or independently take from why or why not those companies worked. With that, should we hop into our first episode?

I think we should. So the company that we have chosen as the acquiree is Pixar. And the company that obviously acquired Pixar was Disney in 2006. And this isn't a typical, you know, straight, obvious technology acquisition. There's a lot more to this, the storytelling aspect and the entertainment media production. It's really not a straight tech company when you look at it. And I think that's kind of what's going to make this a really interesting first episode. Totally. And Ben and I were chatting about this before we started recording. All of that is true. And yet, I think you could view Pixar as like the first example of software

eating the world. So we'll get more into it. So we're going to break this episode and potentially all future episodes into a couple sections. So first, we're going to talk about the acquisition history and the facts. Then Ben and I are each going to put the acquisition into a couple sections. So first we're going to talk about the acquisition history and the facts. Then Ben and I are each going to put the acquisition into a category. What do we think was kind of the key piece of it and the rationale behind why the acquiring company purchased this acquisition target. Then we're going to talk about what might have happened had history been different. What if this acquisition hadn't gone through? And finally, we're going to assign each acquisition a grade. So let's start with the history and the facts. So January 2006, Pixar is

a publicly traded company. Disney announces that they are acquiring it for $7.4 billion, estimated roughly 45 times estimated Pixar earnings for that year. And Disney and obviously Pixar changed forever since. And famously, that is the day that Steve Jobs became the largest single shareholder of Disney stock, which Lorene Powell Jobs still holds as part of the estate. Led to a long relationship between Disney content and Apple technology products. Yeah, super interesting. That's probably outside the bounds of this episode. But one thing we were planning for this episode we didn't even think about is kind of ancillary benefits there of cooperation between apple and disney and revenue created for both companies

totally and uh so as we were we were researching kind of the background and and history here one stat that that jumped out to me that i thought was just so cool especially since we're focusing on technology acquisitions in this podcast um pixar uh ip 1995. You know what else IPO'd in 1995? Netscape. Which do you think was the bigger IPO? Well, you're pausing the question, so I'm going to go Netscape. You would be wrong. Really? Pixar was the largest IPO of 1995, bigger than Netscape.

Wow. That's not one that the history books often refer to. And I think if I'm getting, if my memory's right, also ended up being the larger acquisition than Netscape. Pixar being $7.4 billion, and I think Netscape was, I could be wrong here, but around $3 billion-ish. Is that to AOL? I think so. In the future,

when there's actually people that listen to this podcast, we could totally have a chat room and they could be correcting us in real time. This could be great. But since David and I are both holding microphones and I haven't ordered stands yet, we'll leave the Googling to our fair readers. But I thought that was just totally cool, right? Like, here's this technology company being bought by a media company, much like Netscape was bought by AOL, which was then merged with Time Warner. And here is this technology company that ends up being both the largest IPO in this banner year and one of the most important acquisitions of all time. So after the acquisition in 2006, Disney and Pixar, Disney Pixar, as it was rebranded, has since then released several films. I believe, let's see, the list is Cars later in 2006,

Ratatouille, WALL-E, Up, Toy Story 3, Cars 2, Brave, Monsters University, and Inside Out. Just going on box office stats alone. So if you take worldwide box office for those films and subtract out production budgets for those films, now that's not the total story on profits. You know, of course there is, uh, both on the revenue side, additional revenue from merchandise, from DVD sales, from streaming, and especially as part of Disney theme parks, theme parks theme parks um and then there's

additional costs both in in the cogs for those items but also in marketing costs both for the film and otherwise but just going with the numbers that we have um publicly available uh those films since the acquisition have made just about seven and a half billion dollars in revenue and about four and a half billion dollars of profit so 10 years later here we are four and a half billion dollars of profit uh based on a 7.4 billion dollar acquisition price it's kind of interesting i mean there's tons and tons of other ancillary benefits aside but um you know we could have a 15 they're they're the pace of their profits per film is accelerating so you could have a 15 year payback period on the uh on the acquisition and i think um um you know we'll kind of get into this a little

bit more but just kind of looking at the spot that disney was in the spot that pixar was in if you could go to uh you know disney exec at at the time and say, it's going to be 15 years before you really start seeing profits on top of this acquisition. But look at what Disney has been historically, the powerhouse of incredible animation and sort of the source of magic for children and adults alike. And kind of what happened to that since Toy Story 1? I mean, Pixar had the monopoly on magic and for creating the most successful, incredible films in animation. And I think that, you know, is Disney sort of reacquiring its roots? And to me, you know, the 15-year price tag for that isn't too bad.

Totally. And I think this is a great segue into the next section of our episode, which is, you know, how would you categorize this acquisition? And some of the categories that we'd identified are, is this about people? Is this about technology? Is this a product that the acquirer is buying? A business line? Or is it something else? Yeah. It's funny. There's certainly a people element, but it's not like they were repurposing these people on something. I think in a people acquisition, you typically talk about they wanted the really smart people to go to work on existing products with existing customers. That's certainly

not the case, except with one specific person we can call out and probably other people we don't know about in the organization. Technology, there's something there, but Pixar started by being a pure technology company and not having any animated films out there. They were just the pixar computer with render man software on it so the ability for for lucasfilm and then for for others to do 3d animation and that's and i think this is you know before we render judgment on what category we'd put this acquisition into i think that's a really important point that it's worth discussing like pixar is a technology company um and you know it was created as a division within lucasfilm there's a long history even going back prior to lucasfilm but

but it really came together as an organization there to solve problems you know within lucasfilm and be a technology enabler uh for george lucas and what's interesting is that like a lot of technology companies it was then spun out uh by steve jobs and sold by by lucasfilm to steve jobs and like a lot of technology companies it started really small with what it could do with computer animation it made short films it was trying to push its technology to other film companies totally and i mean even before they were making short films they were they were purely that that render man software on the pixar animation computer and the to your point and starting small like the ability for hardware to do this sort of thing at the time if you're

if you go back and watch the luxo jr or the rotating hand any of the really old pixar animation stuff it's so limited and you can totally see even toy story oh yeah i mean there's no faces in toy story there's no human faces because it was too sophisticated at the time and people talk about big technology companies starting as toys i mean literally pixar didn't start with toy story but their first big hit was toys. Yeah. Yeah, I mean, the thing we're actually talking about is there, before the episode, is this just classic low-end disruption at play? I mean, the kind of famous story about John Lasseter is that he came to Pixar and to Ed Catmull with sort of this love for creating animation. And not the technology of it, but the art of what kind of storytelling you could do with it. And I think I wrote this down.

He was actually hired, uh, and Catmull believed in him, but he wasn't allowed to hire animators. He was hired with the title of interface designer and no one questioned Catmull's decision, but what John was doing was kind of on the side, exploring the possibility of doing real storytelling in this incredibly

limited medium totally and and and um i think also if i'm getting my history right laster started his career at disney he was an incredibly passionate disney employee it's all he ever wanted to do was be an animator there and he was fired because he was espousing this new technology, this computer animation, which people didn't believe would be capable of being part of the Disney way. It's so interesting to think about, thinking about what we look at today that we laugh off as like,

well, that'll never be good enough. That tech isn't, I mean, that's laughable. How could you ever take that rotating hand and rival the power of Beauty and the Beast with that? Actually, Beauty and the Beast, I don't think it out yet but you know snow white or anything like that and and you can totally see how how it just gets incrementally better it gets better every time and it's one of those things where you have to check yourself when you're thinking well that can't possibly be the future like look at vr today the screen door effect the lag the price like everything about it you're're like, that is impossible.

There's no way that ever reaches mass market. And then like, you know, some of these things die on the vine. But really, if you're going to win at some of these things, you get in early and it's a matter of time. And you grow with the medium and with the technology. And I think the other point, as I was thinking about this and Pixar as a technology company, is even with the short films, but especially with Toy Story, they embraced the limitations of the medium and yet delivered a full solution within it. They didn't skimp on emotional connections within their movies, even when the technology was arguably inferior to both live action and traditional animation. They were able to deliver incredible emotional experiences. And I think those are just hallmarks of all technology companies that are operating in new spaces and at the bleeding edge.

It's cool to think about the things that they intentionally did because they would fit well into that medium i mean you look at it at toy story or luxo jr i mean these things were basic shapes a ball where you could easily map a pattern onto it that's rolling and the lamp jumps on it it's because it's so easy to render a sphere and it's you look at brave i mean it took 25, 30 years to do something like Brave, where they had to do this fierce, incredible hair. Or cars, where they had thousands, tens of thousands, hundreds of thousands of vehicles flying around in the background and all this crazy stuff. John knew the team that was there early knew that the important thing was really communicating that story and picking whatever kind of visual representation they needed to fit the medium to still deliver that complete solution as you put it yep um so that would argue that uh

the technology clearly a critical part of Pixar critical Critical, but you know, Pixar was kicking the crap out of DreamWorks. I think that the computer animation hadn't become commoditized per se, but they weren't the only ones with it. Yep. So in terms of categorizing this acquisition,

so I think, you know, for me, as I was thinking about this, I would actually put Characterize Pixar Best as a business line acquisition for Disney. And the reason I say that is twofold. One, it's interesting what Disney did with Pixar and looking at that almost as a blueprint with things like what Facebook's done with Instagram and with WhatsApp and with Oculus, they kept it completely separate. And this was for the most part driven by the Pixar side of the house. But the studios are in separate locations. Disney Animation is in Southern California.

Pixar is in Northern California in the Bay Area. The teams are completely separate. There is no cross-pollination on projects. With the exception of the leadership. With the exception of the leadership, yes, which we can get to in a second. But really, Pixar has remained its own brand and its own business line, quote-unquote, today. So that's reason one. Reason number two is, as I was reading about the acquisition, there's this great story i read um that supposedly is true that uh bob eiger uh the ceo of disney realized the new ceo of disney when he acquired when the company acquired pixar realized that he needed to buy pixar with which they had a film

distribution deal in the past when um he was looking at a parade at a disney theme park and all the characters in the parade and he realized that the characters that were developed in the past 10 years none of them were disney characters all or almost all of them were pixar characters and that's when he realized pixar needs to be an official whole wholly owned part of Disney. Yeah. It is interesting to think about. The thing that made Pixar special is this really incredible studio thing that they had going that no one else had

in the ability to produce movies. And it wasn't, you know, when they talk about the big studios, there's hits and misses. There's big blockbuster hits that they put lots and lots of money into, and just miss and the things that that pixar has put out you know with the exception of cars 2 which is not necessarily critically acclaimed like every single one is a box office hit and nothing pixar does sees the light of day

unless it's wonderful i mean there's this emotional connection for kids and adults alike. And it's something where, you know, they have this really intense internal process where I think three or four directors over the course of their history have been fired in the middle of projects. They have this really incredible review of, you know, the kind of Pixar brain trust sitting around reviewing milestones and watching early, early screenings. They have a talent development where if there's a young promising director coming up, they do a short first and they kind of prove themselves and the super signature shorts that Pixar does.

And it's, it's this process where, you know, when you think that, I think it's, I don't know if it's Christiansen or there's, there's a very business school theory of, of the fact that the, what a business really is is people, processes, and priorities.

And that was very, very clear at Pixar. And I think that the processes and the priorities had just as much to do with the acquisition as the people did in this case. Absolutely. And then John Lasseter and Ed Catmull, the principals at Pixar, aside from Steve Jobs, went on to assume control of all of animation within Disney. Yeah, and you look at it. I mean, what Disney needed to learn to do was not ship crap. I mean, truly, like, only put out really wonderful films.

And, you know, they're not to a Pixar level yet. When things have Pixar's name on it, it's a different level of quality. But, you know, Frozen wasn't Pixar. That was Disney. I mean, that was Disney learning from Lasseter Pixar, the process that they had there and what computer animated joy looked like. And we won't name names here. Well, I'm not even going to go to being in Seattle. But how much does that sound like technology companies, right?

Don't ship crap. Yeah. And when technology companies go wrong, let's use Apple as a non-controversial example. There were a number of years in the wilderness when Apple was shipping crap. Yeah. Yeah, I'm sure we'll have many more episodes about Apple. But obviously the the steve jobs uh thread runs deep in both of these companies yep um so ben category for you

oh it's a business line i mean it's it's processes but it's it's a business line they're um you know this is this is not something that they're kind of like co-marketing to the same customer segment. This is not a thing where they're having the Pixar people at large work on Disney products. This is something where they have incredible respect for the existing Pixar business and they're keeping it separate. All right, listeners. Our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to midsize businesses and provides enterprise grade security with the technology, services and expertise needed to protect you.

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with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. All right, let's move on to, I think, a very interesting segment of our show, which is what would have happened otherwise? Let's say Disney didn't buy Pixar. Where would we be standing today? Or where would they be standing today? We'd probably still be right here in Seattle. I wouldn't be worried about Pixar. But I would be worried about Disney.

I think that Pixar probably wouldn't have grown like it has, having distribution into Disney's theme parks and a much more significant marketing budget behind it but um you know they they had a they had a passionate passionate following and that wasn't there was no small following they were grossing over 100 million dollars each film um well over 100 million yeah actually i think i think we just looked at 400 million dollars and uh inside out most recent was was uh well wait profit or gross inside out um had had revenues at i think eight eight hundred thousand eight hundred million so inside out which is i believe

still in theaters some theaters i tried to watch it this weekend on my apple tv and i couldn't so it's not on streaming that. That is a weird period. So there's this time where no one's allowed to watch it on anything. You know, total aside here, X number of years from now with X being well less than 10. We're going to laugh at that. That is going to be ridiculous. I was talking with my wife about this the other day. And I was like, you know, we don't have kids yet. But someday, hopefully, we'll have kids.

And they'll become culturally aware at some point, hopefully. And one day, Jenny and I are going to be talking about television. And our kids are going to look at us and say, what's television? Yeah. Total aside there. Wild. yeah total aside they're wild um so inside out uh which is still not you know run its course has uh grossed in worldwide box office over 800 million dollars had a 175 million dollar production budget so over 600 million dollars in profit wow yeah i mean so there there's there's disney magic there that yep um you know we we can't say

that's all pixar but really i think i think disney was a little bit lost um had a new ceo who had a clear vision um and i think that um i'd be a lot more worried about disney than pixar so what i i say about this um i did two things i think on the pixar side this really is a good example of um you know the actually working in practice the rationale that a lot of uh leadership teams of acquired companies will say which often sounds hollow which is that going with the acquirer will give you the scale to have an impact at the level much faster and much bigger at a level that you couldn't do standalone that's in so many blog posts totally right um but here i think it's really worked you know i mean cars land, Cars Land. I don't know, Ben, if you've been to Disneyland recently.

I've been twice, I think, in the past couple of years. All you guys out there, if you haven't been to Cars Land at Disneyland in LA, you got to go. It's amazing. I'm booking tickets. And Disney spent a billion dollars, over a billion dollars, creating Cars Land. None of that would have happened if Pixar weren't part of disney so that's that's that side and then i think on the disney side what's super interesting is that this kicked off really not just a transformation of disney animation but a whole transformation of how they thought about their IP and their entire film business.

So since Pixar in 2006, they then acquired Marvel in 2009. And you only need look at The Avengers and Iron Man and Thor and Captain America and all of those movies and arguably superhero fad that we've been in recently but they've made a ton of money from that uh but then lucasfilm um a couple years ago and uh i don't know about you ben but i am quite excited about this december to buy your tickets yet i'm not buying tickets yet you know it's interesting they really have put together a playbook for how to take a hugely successful franchise with a big following and people that grew up on something and just has a special place in people's hearts and really just turn it into a machine. I mean, you look at the amount of Star Wars. I mean, there's obviously 7, 8, and 9, but there's other films that are coming out.

There's new video i mean they've totally reinvigorated the franchise and taken the love of that fan base and turned it into something that you know is is um like something it's a uniquely disney asset is their ability to amplify a franchise yeah and and what they've done with both marvel and star wars i think that that um disney learned a lot from buying pixar and not well i don't know how uh not safe for work we want to make these podcasts but not i think i think we can't swear otherwise we will get the itunes explicit tag other than that well not you know f bombing up the the creative process in in you know in the process of doing this and i think that's that's something would that have happened without pixar right like you know marvel fans i'm sure they're plenty out there who would argue that it's you know become too

commercial and it's lost the you know whatever but but that would be a small minority i mean the the the marvel comic book franchises now and movies are at such a better point i i would argue than they were before the acquisition and we'll see what happens with star wars this december um but like what if dicks what if what if what if disney hadn't acquired pixar hadn't gone through that experience would they be equipped to digest marvel and lucas film in the same ways yeah it's interesting i mean that that's a yeah it's not an asset that pixar had but disney trains institutional muscle in learning how to do that successfully and that's um i mean that that's how you get these sort of one plus one equals three things where

it wasn't an asset that either company had but the process of the acquisition itself forced them to get good at a thing that would determine their future success all right i feel like it's time we should wrap up overall grade we're going with a through f here disney pixar what's your verdict well david we had our choice of picking any single acquisition in history of technology to do this. So, you know, I'm like looking for reasons not to give it an A, but there's kind of a reason we picked it for our first episode. So thank you for the softball. I'm going to go with A. I'm going to disagree a little bit. So, and I think this illustrates just

how hard M&A is overall. You know, it's been 10 years since Disney acquired Pixar. Of course, for all those reasons that we were just talking about, incredibly successful, has transformed Disney in many ways.

No brainer that this was a great acquisition by Disney. On the other hand, you look at this financially, they spent seven and a half billion dollars for it. Now, they've probably, when you account for everything, which only the internal teams in Disney can and even then probably not fully, they probably made that back but it's been 10 years so financially you know and i i contrast that with in 2006 um facebook was two years old at that point and now what's facebook market cap i don't know whoa so every acquisition is unsuccessful because it does not match the growth of one of the greatest technology companies of all time? Yes.

Let's track the public markets as a – I'm self-justifying myself here why I'm more excited about being a venture investor than I am about working for M&A teams in public companies. Nothing wrong with working at M&A teams in public companies. Nothing wrong with working at M&A teams in public companies. So I guess where I'm going is I would hope that to get an A, this would have to be, something would have to be just such a grand slam on all levels that everybody can retire and be career making.

And what's interesting is that even this, which is, we picked it as the first, the first acquisition of our show, you know, this, it's hard to get much better than this on all levels. And yet it's not totally clear that this has just turned into an incredible,

you know, cashflow decision, um, as opposed to a, you know cash flow decision um as opposed to a you know investment in facebook in 2006 you give it a grade then i'll make a point i'm gonna give it a b plus oh maybe a minus we have we have pluses and minuses guys b plus slash a minus um the thing that i think you're not taking into account and you know i'll acknowledge my own bias here of being just absolutely enamored with pixar toy story defining my childhood you know my awol screen name was bj lightyear my going deep here yeah pix Pixar has a very, very deep place in my heart.

All that said, I think the thing that is not factored into the financial decision is, and actually we don't really ever know what it would look like otherwise, but the long-term success and health of Disney, what would that look like without Pixar? What does Disney look like 20 years from now without Pixar? Well, and here's the question, which we answered in the,

what would have happened otherwise, but, um, is there a Pixar land? If there's not Disney, Pixar, get cat mall on the phone. All right.

With that, thanks for tuning in. We'll see you next time. Have a good night guys. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now?

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