11

The Gatekeepers

Whether the goal is to raise money to procure spices in the Banda Islands, or to make animated movies in Point Richmond, California, a business must have a way to find that money. If money is to be raised from the public, that task is the job of a highly specialized and often misunderstood corner of the banking world: investment banking.

Investment banks bring together those who have money—investors—with those who need it—businesses. When companies want to go public, there is no way to do it without an investment banker serving as the intermediary. They are the gatekeepers guarding the pathways that lead to money. If there is a singular function that defines the role of investment banks, it is to certify the quality of the businesses into which investors put their money. An investment bank would have to provide an indelible seal of approval to Pixar’s value and credibility as an investment. Only then would we be able to talk to investors directly.

To purchase stock in a company, an investor must assess how to value that stock. Stock is nothing other than a tiny piece—a share—of a company. If a company has ten thousand shares of stock and they sell for $50 each, the company is worth $500,000. If the same shares of stock sell for $100 each, the company is worth $1 million. In order to know how much to pay for stock in a company, an investor has to know the company’s value.

Assessing a company’s value is one of the chief tasks of investment banks. Their job is to look at every aspect of a company’s business—its history, assets, debts, products, profits, markets, distribution channels, management team, competition, and anything else relevant to its success—and make an assessment of its value and the risk of the investment. They are the ultimate tire kickers. Once their assessment is complete, the investment bankers find investors and facilitate the sale of the company’s stock. An investment bank’s entire reputation rests on credibly helping investors understand the value and risks of an investment. This extends not just to IPOs but to all kinds of transactions where valuing a company is at stake.

In exchange for this service, investment bankers earn a little percentage of the amounts invested in each transaction. Although calculated in different ways, this is like charging a small tax on the world’s investments. A percentage of much of the world’s financing transactions adds up very, very quickly, which is why the successful modern-day investment bankers have achieved wealth, power, and prestige at levels that are fit for royalty. Gatekeeping the world’s capital markets is a very lucrative business.

Investment banks come in all shapes and sizes, some small and local, some operating in every corner of the world. They often specialize in different industries and have relationships with different types of investors. In Steve’s mind, however, there were only two worth considering. These were the undisputed kings of the investment banking world: Goldman Sachs and Morgan Stanley.

Both Goldman Sachs and Morgan Stanley had stellar reputations in Silicon Valley, having had a hand in many of Silicon Valley’s most celebrated IPOs, including Apple’s in 1980 and, most recently, the famous Internet start-up Netscape, both of which were led by Morgan Stanley.

There was enormous cachet associated with retaining Goldman Sachs or Morgan Stanley to lead an IPO. Any hot start-up seeking to go public would invariably place its first call to one or both of them. It was common for several investment banks to be involved in each transaction, with one taking the lead role. That bank would drive all aspects of the transaction, including the process for valuing the company, overseeing the SEC filings, introducing the company to investors, and ultimately initiating trading of the company’s stock in the public stock markets. Goldman Sachs and Morgan Stanley usually took only the lead position, which meant that they were not often involved in the same transaction. Pixar could use only one of them, a topic that Steve loved to consider.

“Who do you think would be better?” he asked one day as we drove up to Pixar. “Goldman or Morgan?”

“I’m not sure,” I said. “For me it depends on how excited they are about Pixar, and especially how excited their analysts are about following Pixar.”

Analysts were vital components of investment banks. They were individuals who wrote long reports describing each company and making predictions about its future performance. Long after Pixar’s public offering, the analysts at the investment banks would continue to write these reports, assessing Pixar’s business on an ongoing basis for the benefit of the investing world. It was vital that we have analysts who were excited to write about Pixar. Without them, it would be easy for Wall Street to forget about us.

“They both have offices in LA,” I continued, “and we’ll need to speak to their people there to access their entertainment industry expertise.”

“Do you think there is any chance that both Morgan Stanley and Goldman Sachs might take Pixar public?” Steve asked.

“That would be extremely rare,” I said.

“They might do it,” Steve went on. “There’s a lot in it for both of them. A chance for each of them to be part of one of the hottest IPOs of the year.”

I could see that Steve was not so much interested in which of the two I preferred. He had something else in mind. He wanted both.

“Well, we can ask,” I said. “No harm in trying.”

If Steve wanted both Goldman Sachs and Morgan Stanley to be involved in Pixar’s IPO, I certainly wouldn’t be against it. Actually, I’d be ecstatic. I’d be thrilled to work with even just one of them. Maybe Steve had the clout to tell them they had to work together in order to have Pixar’s business. I didn’t think we were in a position to be too presumptuous, though, and I worried about blowing it with Goldman Sachs or Morgan Stanley by telling them they’d have to work together.

“Let’s meet them first,” I suggested. “Then we’ll gauge their interest.”

The heads of the Silicon Valley branches of Morgan Stanley and Goldman Sachs could not have been more different. Frank Quattrone, of Morgan Stanley, was probably the best-known investment banker in Silicon Valley. He had a legendary, larger-than-life reputation for being bold, gregarious, difficult to impress, and a great fighter once he was on your side. He was tall, with a stocky build, a thick mustache, and an infectious smile. His personality would fill a room. He had been involved in taking many hot tech companies public, and everyone vied for his attention. He was also the lead banker for Netscape’s IPO, the hottest IPO of the year so far.

Eff Martin of Goldman Sachs was quieter and more understated. He had a warm smile and conveyed a polished and polite demeanor. If Frank Quattrone came across as Wild West, Martin was more Establishment East. About ten years older than me, Martin had a pleasant, easygoing way about him. He always seemed calm and relaxed.

Steve placed the first call to each of them to invite them to learn about Pixar. They were both enthusiastic. The game was on.

Steve and I prepared a dog-and-pony show, an informal presentation that depicted Pixar’s vision, business plan, and the risks associated with realizing that plan. The story, essentially, was that we were going to do in the 1990s what Disney had done in the 1930s, usher in a new era of animated entertainment that would take advantage of a new medium for storytelling, and in so doing create iconic films and characters that would be beloved the world over.

We made a plan that our meetings with Morgan Stanley and Goldman Sachs would begin with Steve presenting Pixar’s vision, then I would take the lead on describing our business strategy—the four pillars. That would take us to a discussion of Pixar’s business in which the risks and challenges would naturally be a part. Following my earlier discussion with Larry Sonsini, we were well prepared to discuss the risks.

The meetings went off without a hitch. Steve did a fantastic job mesmerizing Quattrone and Martin over Pixar’s potential. They could hardly have been more enthusiastic about the vision and strategy. They understood Pixar was not the typical Silicon Valley tech company, and both said they wanted to involve their entertainment specialists in LA. Even the discussion over Pixar’s risks had gone well.

“How long do you think it might take for Pixar to share in more of the profits from your films?” Martin asked.

“There’s nothing forcing Disney to renegotiate,” I said. “They could hold us to the terms of our existing arrangement, in which case it would take until our first three films have been released, maybe seven or eight years from now. If Toy Story is a hit, they might be willing to renegotiate early, especially if we’re prepared to finance our own films.”

“Have you indicated you might want to renegotiate?” Martin asked.

“Our feeling is that it’s too early,” I explained. “It would be better after releasing our first film, and after we have the funds we need.”

“Yes, yes, of course,” Martin said. “That makes a lot of sense.”

I could tell Steve was antsy in this part of the discussion. He was itching to move on, to turn the talk back to Toy Story and the dream, the part where Pixar changed the world. But I knew that although Quattrone and Martin did not know the entertainment industry deeply themselves, they had experts in Hollywood who did. These would be individuals who had spent their careers analyzing the entertainment business. It wouldn’t take them more than five minutes to figure out the financial challenges of making computer-animated feature films. I wanted them to think we knew what we were doing rather than look like entertainment neophytes who didn’t understand the business.

All in all, these meetings had gone very well, and I would have been thrilled to work with Quattrone or Martin.

“Both of them loved the story,” Steve said excitedly. “Next we bring them to Pixar. I think that’ll make them even more excited.”

I had no doubt that it would. They would be on our home turf at that point. Many companies never got that far with Goldman Sachs or Morgan Stanley. Having them both visit Pixar was a big deal.

After so much skepticism over whether we would be able to take Pixar public at all, I started to feel that perhaps we had more going for us than I had thought. With the world’s two most prestigious investment banks gearing up for a visit, it was possible we had a shot. It was even conceivable that maybe, just maybe, we would work with both of them. That would even outdo Netscape.