Acquired - Pixar

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2:31Welcome 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 ourselves. We'll talk about what the point of this podcast is.

3:03and 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 and see if they work and spin them out. I'm David. I'm a principal here at Medirone Adventure 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 acquirer. Yeah, so it's funny. This is a This is podcast was something David and I were we're thinking up well We're out drinking and has all good podcast started 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

3:59So many examples of the opposite of like boy that was huge right 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 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 it was actually a good investment in the future 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 the acquiring is Pixar and the company that that obviously acquired Pixar was Disney in 2006 and this isn't a typical You know straight obvious technology acquisition. There's there's a lot more to this

4:59the 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.

5:26So 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 category. What do we think was kind of the key piece of it and why 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.

6:25Disney and obviously Pixar changed forever since. And famously, that is the day that Steve Jobs became the largest single shareholder of Disney stock, which Lurine 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.

6:50One thing, when we were planning for this episode, we didn't even think about as kind of ancillary benefits there of cooperation between Apple and Disney and revenue at Creative for both companies. Totally. And so as we were researching kind of the background and history here, one stat that jumped out to me that I thought was just so cool, especially since we're focusing on technology acquisitions in this podcast, Pixar IPO'd in 1995. You know, it also IPO'd in 1995. Netscape.

7:21Which do you think was the bigger IPO? Well, you're positing the question. So I'm gonna 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 three billion ish. Is that to AOL? I think so. In the future when there's actually people 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.

8:22which 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. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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10:25So, 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, Wally up Toy Story 3, Cars 2.

10:51Brave. Monsters University and Inside Out. Just going on box office stats alone, so if you take worldwide box office for those films. and some tracked out production budgets for those films. Now, that's not the total story on profits. Of course, there is both on the revenue side, additional revenue from merchandise, from DVD sales, from streaming, and especially as part of Disney theme parks. And then there's additional costs, both 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, publicly available, 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 a profit so ten years later here we are four and a half billion dollars a profit based on a seven point four billion dollar acquisition price it's kind of interesting I mean there's a tons and tons of other ancillary benefits aside but

11:59You know, we could have a 15 they're the pace of their profits per film is accelerating so you could have a 15-year payback period on the on the acquisition and I think You know, what kind of get into this a little bit more but I just kind of looking at the spot that Disney was in the spot that Pixar was in if you could go to You know, Disney exec at the time and say, you know, it's gonna be 15 years before you really start seeing you know profits on top of this acquisition, but Look at look at what Disney has been historically the powerhouse of Incredible animation and sort of that the source of magic for children and adults alike and Kind of what happened to that since toy story one I mean toy picks our head the monopoly on magic and for creating the most successful incredible Films in animation and I think that you know is Disney sort of re-acquiring its roots and to me

12:57you know, that the 15 year price tag for that isn't too bad. Totally. And I think this would be, this is a great segment to the next section of our episode, which is, you know, how would you categorize this acquisition, you know, and some of the categories that we'd identified are, is this about people, is this about technology, is this product that the acquires buying a business line, or is it something else? Yeah, it's funny. There's certainly a people element.

13:28but it's not like they were repurposing these people on something. I think in a people acquisition, you typically talk about, you know, they wanted to really smart people to go to work on existing products with existing customers. That's certainly not the case except with one and 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, you know, Pixar, Pixar started by being the pure technology company and not having any.

13:55Any animated films out there they were just producing the Pixar computer with render man software on it the ability for Lucas film and then for others to do 3d animation and 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 And it was created as a division within Lucasfilm. There's a long history even going back prior to Lucasfilm, but it really came together as an organization there to solve problems within Lucasfilm and be a technology enabler for George Lucas. And what's interesting is that a lot of technology companies, it was then spun out by Steve Jobs and sold by Lucasfilm to Steve Jobs.

14:50And 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 even before they were making short films, they were purely that that render man software on 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 old if you go back and watch the Luxo junior or the rotating hand any they're really old Pixar animation stuff It's so limited and you can totally even toy story. Oh, yeah, 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 fix our didn't start with toy story, but their first big hit was toys. Yeah

15:41Yeah, 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 they're they're The kind of famous story about John Lasseter is that he came to Pixar and to Ed Catmo was sort of this this love for 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 at catmo believed in him, but he wasn't allowed to hire animators. He was hired with the title of Interface Designer. And no one questioned catmo'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 I think also if I'm getting my history right, Laster started his career at Disney and was incredibly passionate Disney employee. It's all he ever wanted to do was be an animator there.

16:34And 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, you know, thinking about what we look at today that we laugh off as like, well, that'll be never be good enough. That, that tech isn't, I mean, that's, that's laughable. How could you ever take that rotating hand and rival the power of beauty and the beast with that, you know, actually beauty and the beast, not think it was out yet?

17:03You know, it's no white or anything like that. And you can totally see 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 tag, like everything about it, you're like, that is impossible. There's no way that ever reaches mass market. And then like, you know, Some of these things down the vine, but really if if you're gonna win at some of these things you get an 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 and Pixar as a technology company is even with the short films, but especially with Toy Story they embrace the limitations of the medium and yet delivered a full solution with it, you know they

17:53didn'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.

18:19And 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 Toy Story or Luxo Jr. I'm using her basic shapes, a ball where you could easily map it 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 you look at Brave. I mean, it took them 25, 30 years to do something like Brave where they had to do this fierce, incredible hair or cars where they had, you know, thousands, tens of thousands, hundreds of thousands of vehicles flying around in the background, all this crazy stuff. They just, they knew that, or maybe 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. So, that would argue that the technology, clearly a critical part of Pixar,

19:18critical, but, you know, that 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 characterized 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.

20:09But 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, yes, which we can get to in a second.

20:28But really Pixar has remained its own brand and its own business line quote-unquote today. So that's reason one. Reason number two is that was reading about the acquisition. There's this great story I read that supposedly is true that Bob Eiger, the CEO of Disney, realized the new CEO of Disney when he acquired, when the company acquired Pixar.

20:51realized that he needed to buy Pixar with which they had a film distribution deal in the past when 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 ten years none of them were Disney characters all are 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.

21:21It 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 they just miss. And the things 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.

21:51And 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...

22:15kind of Pixar brain trust sitting around reviewing milestones and watching early screenings. They have 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 this process where, you know, when you think that I think it's, I don't know if it's Christian Sin or there's a very business school theory of the fact that what a business really is is people processes and priorities. And it 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 Katmull, the principles at Pixar aside from Steve Jobs, went on to assume control of all of animation within Disney.

23:14Yeah, and you look at, 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 Laster Pixar, the process that they had there and what computer animated joy looked like.

23:44And we won't name names here. 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. And when technology companies get wrong, let's use Apple as a non-controversial example. There were a number of years in the wilderness when Apple was shipping crap.

24:16Yeah, I'm sure we'll have many more episodes about Apple, but obviously the Steve Jobs thread runs deep in both of these companies. So Ben, category for you. Oh, it's a business line. I mean, it's processes, but it's a business line. This is not something that they're kind of like co-marketing to the same.

24:41customer 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. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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27:06I think that you know picks are probably wouldn't have grown like it it has having a Distribution into Disney's theme parks and a much more significant marketing budget behind it, but 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 a hundred million dollars each film Well over a hundred million. Yeah, actually I think I think we three four hundred million dollars and Inside out most recent was was Well, wait profit or gross and inside out had had revenues at I think 800 that yeah, 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's in that weird That is a weird period so there's like this time where no one's allowed to watch it on anything. You know total aside here

28:02X number of years from now with X being, like, well less than 10. We're gonna laugh at that. That is gonna be ridiculous. Like, I was talking with my wife about this the other day. And I was like, you know, when we don't have kids yet, but someday, hopefully we'll have kids and, you know, they'll become culturally aware at some point, hopefully. And, you know, one day, Jenny and I are gonna be talking about television. And our kids are gonna look at us and say, what's television? Yeah.

28:31Total aside there wild So inside out which is still Not you know run its course has grossed in worldwide box office over eight hundred million dollars had a hundred and seventy five million dollar production budget So over six hundred million dollars in profit Yeah, I mean so there's there's there's dizzy magic there that yep We can't say that's all Pixar, but really, I think Disney was a little bit lost. I had a new CEO who had a clear vision, and I think that I'd be a lot more worried about Disney than those are. So what I'd say about this, I did two things. I think on the Pixar side, this really is a good example of actually working in practice the rationale that a lot of

29:28Leadership teams of acquired companies will say which often sounds hollow which is that Going with the acquire 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 But here I think it's really works. You know, I mean cars land cars. I don't know if 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 Car's Land at Disneyland in LA, you gotta go. It's amazing. I'm bucking tickets. And Disney spent a billion dollars over a billion dollars creating Car's 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

30:24This 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 They're super hero-fad that we've been in recently, but they've made a ton of money from that. But then Lucasfilm a couple of years ago. And I don't know about you, Ben, but I'm just disappointed about this December. You're buying your tickets yet? I'm not buying tickets yet. It's interesting. They really have put together a playbook for how to take a hugely successful franchise with a big following and then people that grew up on something and just has a special place in people's hearts.

31:24and really just turn it into a machine. I mean, you look at the amount of Star Wars. I mean, there's obviously 7, 8, 9, but there's other films that are coming out. There's new videos. I mean, they've totally reinvigorated the franchise and taken the love of that fan base and turned it into something that is a uniquely Disney asset as their ability to amplify a franchise. And what they've done with both Marvel and Star Wars, I think that Disney learned a lot from buying Pixar.

31:53Well, I don't know how not safe for work. We want to make these podcasts, but I think I think we can't swear Otherwise, we will get the iTunes explicit tag Well, not you know f bombing up The creative process 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 planning out there who would argue that it's you know become too commercial and it's lost the you know whatever, but that would be a small minority. I mean, the Marvel comic book franchises now and movies are at such a better point. I would argue then they were before the acquisition and we'll see what happens with Star Wars this December. But like, what if Disney hadn't acquired Pixar, hadn't gone through that experience, would they be equipped to digest Marvel and Lucasfilm in the same ways?

32:51Yeah, it's interesting. I mean, 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... I mean, that's how you get these sort of 1 plus 1 equals 3 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 strap up. It's overall grade.

33:21We're going with a through app here. Disney, Pixar. What's your verdict? Well, David, we had our choice of picking any single acquisition in history in the 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...

33:54And 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 as 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...

34:24when you account for everything, which only the internal teams in Disney can and even then probably not fully, they've probably made that back, but it's been 10 years. So financially, and I contrast that within 2006, Facebook was two years old at that point. And now, what's Facebook market cap? I don't know. Whoa, so every acquisition...

34:52is unsuccessful because it does not match the growth of one of the greatest technology companies of all time. Let's track the public markets as a... I mean, like... 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. So I guess where I'm going is...

35:22I 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 cash flow decision, as opposed to a investment in Facebook in 2006. You give it a grade, then I'll make a point. I'm gonna give it a B plus. Maybe A minus. We have pluses and minuses, guys. B plus slash A minus. The thing that I think you're not taking into account and I'll acknowledge my own bias here of being just absolutely enamored with Pixar.

36:25to a story defining my childhood. I mean, that was my AOL screen name was BJ Lightyear, my... Going deep here. Yeah. 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 in health of Disney, I mean, what would that look like without Pixar?

36:51What is Disney look like 20 years from now without Pixar? Well, and here's a question which we answered in the what would have happened otherwise, but Is there a Pixar land? Yeah, there's not Disney Pixar Get Captain on the phone All right with that Thanks for tuning in. We'll see you next time. Have a nice guys

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