Every company has a story. Learn the playbooks that built the world’s greatest companies — and how you can apply them as a founder, operator, or investor.
Thu, 15 Oct 2015 16:00
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?
Our presenting sponsor for this episode is not a sponsor but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders so we knew there's a natural fit we know the host of founders well david senra hi david. Hey, man. Thank you for joining us. Thank you for having me. I like how the group is together and then they say it's like the best curriculum for founders and executives. It really is we use your show for research a lot I listen to your episode of the story of a key or read up before we did our Sony episodes is incredible primer. You know he's actually a good example of why people listen to founders and to acquired because all of his greatest entrepreneurs investors they had deep historical knowledge about the work that came before them so like the founder of Sony who did he influence Steve jobs talked about him over and over again if you do the research and I think this is one of the reasons why. People love both of our shows and there's such good compliments is on acquired we focus on company histories you tell the histories of the individual people you're the people version of acquired and where the company version of founders. Listeners the other fun thing to note is David will hit a topic from a bunch of different angles so I just listen to an episode on Edwin land from a biography that David did David it was the third fourth time you've done Polaroid. I've read five biographies of I win land and I think I've made eight episodes of them because in my opinion the greatest such a pretty to do it my favorite entrepreneur personally is Steve jobs and if you go back and listen to like a 20 year old Steve jobs he's talking about Edwin lands my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die but the ideas never do and so Edwin land had passed away way before the apex of apple. But Steve was still able to use those ideas and now he's gone and we can use this ideas and so I think what requires doing what founder trying to do as well is find the best ideas in history and push them down generations make sure they're not lost history. Love that well listeners go check out the founders podcast after this episode you can search for it in any podcast player lots of companies that David covers that we have yet to dive into here on acquired so for more indulgence on companies and founders go check it out. Story on the way. Welcome to the first episode of acquired I'm Ben Gilbert. I'm David Rosenthal and where your hosts. We've 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 our first real episode for the world to hear. We're going to start with a little background ourselves will talk about what the point of this podcast is and then we'll get into the nuts and bolted 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 Madrid Rona venture group were in 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 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 was actually beneficial for the acquirer and I think that there's so 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 work. Required 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 a startup so independently take from wire why not those companies worked with that. Should we hop into our first episode I think we should. The company that we have chosen as the the acquiree 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 a lot more to this the storytelling aspect and the entertainment media production really 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 then I were chatting about this before we started recording. All of that is true and yet I think you could you 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 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 the this 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 agreed. So let's start with the history and the facts so January 2006 Pixar is a publicly traded company. Disney announces that they're acquiring it for $7.4 billion estimated roughly 45 times estimated Pixar earnings for that year. And Disney and obviously Pixar change forever since and famously that is the day that Steve Jobs became the largest single shareholder of Disney stock which we're in pal jobs still still holds as part of the state led to a long relationship between Disney content and Apple technology products. Yeah super interesting that's probably outside the bounds of this this episode but one thing we're planning for this episode we didn't think about as kind of ancillary benefits there of cooperation between Apple and Disney and revenue created for both companies totally and so as we were we're researching kind of the background and and history here what 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. Pixar IPO to 1995 you know it also IPO to 1995. Netscape which do you think was the bigger IPO. Well you're you're positing 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 memories right also ended up being the larger acquisition then Netscape Pixar being 7.4 billion and I think Netscape was I could be wrong here but around 3 billion is that to a well I think so. In the future when there's actually people listen to this podcast we can totally have a chat room and they can 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 much like Netscape was bought by AOL which was then merged with Time Warner. And and 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 retituee wally up toy story 3 cars to 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 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 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. So here's 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 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 you know we could have a 15 there the pace of their profits for films 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 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 going to be 15 years before you really start seeing 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 adults alike. And kind of what happened to that since toy story one I mean toy 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 re acquiring its roots and to me you know that the 15 year price tag for that isn't isn't too bad. Totally and and I think this would be this is great say into 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 but 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 any animated films out there they were just producing the Pixar computer with render man software on it for Lucas film and then for others to do 3d animation and that's and I think this is you know before we render judgment on what category we put this acquisition into I think that's a really important point that it's worth discussing. Pixar is a technology company and you know it was created as a division within Lucas film that there's a long history even going back private Lucas film but but it really came together as an organization there to solve problems you know within Lucas film and be a technology enabler for George Lucas and what's interesting is that like a lot of technology companies it was then spun out by Steve Jobs. And sold by Lucas film to Steve Jobs and like a lot of technology companies it started really small with what it could do with computer animation made short films it was trying to push its technology to other film companies totally and even before they're making short films they were 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 Jr. 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 people talk about big technology companies starting as toys literally fix our in 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 they're there. The kind of famous story about John Lasseter is that he came to Pixar and to Ed catmore 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 town he was actually hired at catmore believed in him but he wasn't allowed to hire animators who's hired with the title of interface designer and no one question catmore'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 I think also if I'm getting my history rate. Lasseter started his career at Disney and was 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 you know thinking about what we look at today that we laugh off as like well that will never be good enough that that tech isn't I mean that's that laughable how could you ever take that rotating hand and rival the power of beauty in the beast with that. You know actually beauty in the beast not think it's out yet but you know it's no white or anything like that 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 that like everything about it you're like that is impossible there's no way that ever reaches mass and I'm like you know some of these things down the vine but really if if if you're going to win at some of these things you get an early and it's a matter of time and you 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 within you know 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. And it's 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 junior using her basic shapes a ball where you could easily map it a pattern on to it that's rolling in the lamp jumps on it is because it's so easy to render a sphere and it's 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 the thousands hundreds of thousands of vehicles flying around in the background all this crazy stuff they just they knew that or maybe John knew that 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 critical but you know that Pixar was kicking the crap out of dream works 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 is I was thinking about this I would. 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 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 products on projects with the exception of the leadership yes which we can get to in a second but really Pixar has remained its own brand and and its own business line quote unquote today so that's reason one reason number two is I was I 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 realized 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 10 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 it is 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 in the ability to produce movies and it wasn't you know when they talk about the big studios there's hits and miss is there's big blockbuster hits that they put lots lots of money into and they just miss and the things that that Pixar has put out you know the exception of cars to 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 in 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 been fired in the middle of projects they have this really incredible review of of you know the kind of Pixar brain trust sitting around reviewing milestones and watching early 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 the 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 there's a very business school theory of of the fact that the what a business really is is people processes and priorities and there's very very clear at Pixar and I think that the processes and the priorities had just as much to do with the acquisition is the people did in this case absolutely and then John Lasseter and Ed catmull the the principles at Pixar aside from Steve Jobs went on to assume control of all of animation than Disney yeah and you look at I mean the what what what what Disney needed needed to learn to do is not ship crap I mean truly like only put out really wonderful films and you know they're not to a Pixar level yet you when things have Pixar's name on it's a different level quality but yeah you know frozen wasn't Pixar that was Disney I mean that that was Disney learning from Pixar the the process that they had there and and what you know computer animated joy looked like and how we 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 yeah and when technology companies go wrong let's use Apple as you know a non controversial example there were a number of years or in the in the wilderness when when Apple was shipping crap yeah yeah I'm sure we'll have many more episodes about Apple but obviously the the Steve Jobs thread runs deep in both of these companies yeah so then category for you oh it's a business line I mean it's it's processes but it's it's a business line there 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. Let's move on to I think a very interesting segment of our show which is what would it happen otherwise let's say Disney didn't buy Pixar where would we be standing today or where would they be standing today well I would probably still be right here in Seattle I wouldn't be worried about Pixar but I would be worried about Disney I think that a you know Pixar probably wouldn't have grown like it it has having distribution in the Disney theme parks and a much more significant marketing budget behind it but you know they they had a they had a passion at 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 actually I think I think we three four hundred million dollars and inside out most recent was was well it was well it was a profit or gross it inside out had had revenues at I think eight hundred that it her inside out which is I believe still in theaters I did some theaters I tried to watch it this weekend on my Apple TV and I couldn't so it's not on streaming that is a weird period so there's like this this time where no one's allowed to watch it anything you know total aside here X number of years from now with X being like well less than 10 we're going to laugh at that that is going to 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 some day hopefully well kids and you know they'll become culturally aware at some point hopefully and you know one day we're getting I going to be talking about television and our kids are going to look at us and say what's television yeah total side 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 wow yeah I mean so there's there's there's dizzy magic there that you know we can't say that's all Pixar but really I think I think Disney was a little bit lost had a new CEO who had a clear vision and I think that I'm I'd be a lot more worried about Disney so what I say about this I do two things I think on the Pixar side this really is a good example of you know the actually working in practice the rationale that a lot of leadership 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 total right but here I think it's really works you know I mean cars land cars I don't know if if you've been a Disneyland recently I've been twice I think in the past couple 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 bucking tickets and 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'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 their entire film business so since Pixar in 2006 they then acquired Marvel in 2009 and you only need look at you know the Avengers and Ironman and Thor and Captain America and all those movies and movies and and arguably super hero fad that we've been in recently but they've made a ton of money from that but then Lucas film a couple of years ago and I don't know about you been but I just decided about this December to buy your tickets yet I'm not going to get 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 turned it into a machine I mean you look at the amount of star wars I mean there's obviously seven eight nine but there's there's other films that are coming out there's new video I mean they've totally reinvigorated the franchise and taken the love that fan base and turned it into something that you know is is like some it's a uniquely Disney asset is their ability to amplify a franchise yeah and what they've done with both Marvel and star wars I think that that Disney learned a lot from buying Pixar and not well I don't know how not safe for work we want to make these podcast but not I think I think we can't swear otherwise we will get the iTunes explicit tag will 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 the Marvel comic book franchise is now and movies are it's such a better point I I would argue then they were before the acquisition and we'll see what happens with star wars this December but like what if Dixie what if 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 Lucasfilm in the same way is 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 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 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 overall grade we'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 of 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 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're 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 when 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 you know 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 so every acquisition is unsuccessful because it does not match the growth of one of the greatest technology companies of all time. Let's track the public market says as a I mean like myself justifying myself here why I why I'm more excited about being a venture investor then I am about being 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 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 is just turned into an incredible you know cash flow decision as opposed to a you know investment in Facebook in 2006 you give it a grade then I'm like a point I'm going to give it a B plus maybe a minus we have we have pluses and minuses guys. People are slash a minus. The thing that I think you're not taking into account and you know I'll all acknowledge my own bias here of being just absolutely enamored with Pixar toy story defining my childhood. That was my A well screen name is BJ light year my going deep here. Pixar has a very very deep place in my heart. All that said I think the thing that that is not factored into the financial decision is and actually we we 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. What what does Disney look like 20 years from now without Pixar. Well here's a question which we answered in the what would have happened otherwise but is there a Pixar land. 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 nice guys. Who got the truth.