24

Just Keep Swimming

On October 21, 2005, in a USA Today column called “Managing Your Money,” Matt Krantz wrote:

 

Pixar’s stock had been a big star, too. The past five years, shares have gained 171%—that’s 22% compound annual average growth. That truly is incredible, if you consider that the broad Standard & Poor’s 500 stock index is down the past five years.

 

But the stock had trouble squeezing into its superhero tights in the second half of 2005.¹¹

 

Pixar’s stock had indeed been a star. Over the previous five years, the value of Pixar had crept up from $1.5 billion to $3 billion to almost $6 billion. With Steve still owning the vast majority of it, he had now gone from billionaire to multibillionaire. More importantly, the run-up in Pixar’s stock reflected an unprecedented run in Pixar’s films. The five original films under the new agreement with Disney had been A Bug’s Life, Monsters, Inc., Finding Nemo, The Incredibles, and the soon-to-be-released Cars. Toy Story 2 had ultimately been released as a theatrical animated feature film sequel but did not count toward the five original films required by the agreement. Collectively, these films had an average domestic box office exceeding $250 million. They also won a slew of awards.

A Bug’s Life won a Grammy for Best Instrumental Composition. Toy Story 2 won a Golden Globe for Best Picture—Musical or Comedy, and a Grammy for best song written for a motion picture. Monsters, Inc. received four Academy Award nominations and won an Academy Award and a Grammy for best original song. Finding Nemo won an Academy Award for Best Animated Feature Film. The Incredibles was nominated for four Academy Awards and won two of them, for Best Animated Feature Film and Best Sound Editing. Ten years earlier, had I told Wall Street that Pixar’s films would perform this way, both in terms of box office performance and in accolades, I am quite sure I would have been laughed out of town.

I had left my day-to-day role as Pixar’s CFO in April 1999. I took a sabbatical to pursue a series of personal interests that eventually led me in some new directions. At that time Steve asked me to join Pixar’s board of directors. As a director, it was my job to look out for Pixar strategically, similarly to the way I had always done. Consistent with the USA Today column, and despite Pixar’s unprecedented success, in 2005 I found myself once again worrying.

The laws of physics suggest we cannot go in one direction forever. Sooner or later, something will slow us down. Whether it be stocks, housing prices, economies, or entire civilizations, even the biggest booms stall. We build castles, churches, and monuments believing they will last forever; our perception of solidity often belies an underlying movement that is difficult to perceive. Sometimes we can see the wave of change coming. But more often we are swept along in it. In my mind, Pixar was facing such a wave.

When a company’s stock price goes up and up on the strength of its business growth, the first sign that its rate of growth is slowing can create enormous downward pressure on its stock price. Pixar’s last two films, The Incredibles, released at the end of 2004, and Finding Nemo, released in the summer of 2003, had been Pixar’s biggest films to date. Finding Nemo had taken in almost $1 billion worldwide. These films had enjoyed heights of success so dizzying that I feared the slightest hint of a slowdown would send Pixar’s stock tumbling.

As the USA Today article had described, this had already happened on the news that DVD sales might be slowing down. The stock had recovered, but the evidence was strong that it was in rarefied air, made even thinner by Pixar’s continued dependence on blockbusters. One small slip and the danger of a big fall was high. This would hurt not just Pixar’s stockholders but the company as a whole. Shareholder cries for change can create enormous pressure on a corporation. It was better to be on top of it.

The solution was to find a way to diminish the risk that a small disappointment might cause the stock to plummet. There were two ways to do this. One was to use Pixar’s highly valued stock to purchase other companies. The effect of purchasing other companies would be to diversify from animation so that if animation experienced a downturn, it would not have as devastating an impact on the company. Diversification had been Walt Disney’s strategy all those many years earlier.

The other way to diminish the risk was to seek a buyer for Pixar. If a large corporate conglomerate were to buy Pixar, Pixar’s stockholders would exchange their Pixar stock at its present soaring value for the stock of the larger corporation where they would enjoy much greater diversification. Over the years, Steve and I had speculated occasionally on how Pixar might ultimately end up being purchased by Disney, but we had never taken this on as a serious possibility.

But by October 2005, I was convinced that Pixar had to at least explore one of these two directions. The financial pressures to produce blockbuster after blockbuster were enormous, and it would not take much to burst Pixar’s balloon. On one of our weekend walks, I broached the issue with Steve.

“I’d like to talk about Pixar’s stock price,” I said.

“What’s on your mind?” Steve asked.

“I think Pixar’s at a crossroads,” I said. “Its valuation is too high to stay still. If we have any miss, any miss at all, even a small one, Pixar’s value could be cut in half overnight, and half of your wealth will go with it.” I paused, and then added, “We’re flying too close to the sun.”

“We’ve had an incredible run,” I went on. “Ten years of blockbusters. But I think it’s time that either Pixar uses its sky-high valuation to diversify into other businesses, just like Disney did, or . . .”

“Or we sell to Disney,” Steve finished my sentence.

“Yes, or we sell to Disney, or anyone else that offers the same opportunity for diversifying and protecting Pixar as Disney does.”

We discussed the first of these options, Pixar diversifying into other businesses.

“To diversify would require expanding Pixar’s management team,” I said. “Pixar’s current management team is tuned for animation. It doesn’t have the bandwidth or the experience to investigate and acquire other businesses. We would need executives who know how to do that, and as CEO you would have to find them. Between your Apple responsibilities and your health, I’m not sure it’s feasible.”

Steve clearly did not have the bandwidth for this option. Although there was plenty of reason for hope with his health, he needed to take care of himself. He was still fully immersed at Apple; there was no way he could take on anything else. The combined effect of Steve’s health and the animation focus of Pixar’s management team led us to option two: finding a buyer for Pixar, the most obvious one being Disney.

“Let me give it some thought,” he said. “I hear what you’re saying. Maybe we should talk to Larry.”

I agreed. Larry Sonsini was still on Pixar’s board of directors. He would help evaluate what to do. Steve and I paid a visit to Larry a few days later in his Palo Alto office. He liked the idea a lot. He agreed that Pixar’s value as a company had reached stratospheric heights that would be hard to sustain. He suggested a meeting with Disney to test the waters.

One never knows if an event that appears detrimental is in fact part of a larger pattern that we cannot see. A year and a half earlier, in early 2004, as the co-production agreement that I negotiated long ago with Rob Moore was coming to an end, Steve called off talks with Disney to extend the agreement. The New York Times reported, “The residue of several years of testy relations, and Mr. Jobs’s distaste for the way Mr. Eisner conducted business with Pixar, may have amplified the typical problems of partnerships into irreconcilable differences.”¹²

Eisner responded by saying that the terms Pixar demanded were simply more than Disney could bear. Ten years of unprecedented success had, perhaps surprisingly, done very little to bring Steve and Eisner close enough to find a way to continue the relationship between Pixar and Disney.

Even more, Eisner’s failure to find a way to extend Disney’s agreement with Pixar added dramatically to mounting pressures on him. Roy Disney, nephew of Walt Disney, resigned from Disney’s board of directors in 2003 and had been waging a “Save Disney” campaign that criticized Eisner’s management style and leadership and called for his resignation. Breaking off the Pixar relationship added much fuel to the fire.

Roy Disney was insistent that without being a leader in animation, Disney would lose its creative soul. Eisner had been unable to withstand the pressure, and on September 9, 2004, he announced he would step down when his contract ended in two years. A few months later, in March 2005, Eisner’s successor was announced: Bob Iger, who joined Disney as president of ABC Television after Disney acquired ABC in 1996. At the end of October 2005, Eisner abruptly resigned from Disney, both as CEO and as a board member, leaving Iger for the first time in complete control. This was the exact moment we began to contemplate the possibility of selling Pixar to Disney.

If there was any time to discuss an acquisition, or any other kind of relationship, this was it. The big question was: How important was animation to Iger? Disney had thriving businesses in television, theme parks, and live-action motion pictures. Iger had risen through the ranks at ABC and was more steeped in the world of television than the world of animated feature films. It was not clear if he would see animation as a relic of Disney’s past or an essential part of its future.

To find out the answer to this question, we arranged a meeting with Iger and Dick Cook, then chairman of Walt Disney Studios. Steve had already had some dealings with Iger over launching Disney content on Apple’s soon-to-be-announced video iPod. Steve, Larry, Ed, and I attended on behalf of Pixar. We gathered in a conference room at Apple’s offices in Cupertino, California.

From the moment the meeting began, the tune of Pixar’s relationship with Disney changed. Gone were the second-guessing and posturing that had characterized Steve’s relationship with Eisner. With Iger there were no games, no politics, no posturing. He was smart, straightforward, and up-front. It was the most positive meeting between the two companies at that level in a decade.

Steve took an immediate liking to Iger, which would blossom into a close collaboration and friendship. Moreover, Iger made it clear that animation was very important to him, and to Disney. He said it was the heart and soul of the company and bringing it back was central to his vision for Disney. Iger did not have to be so forthcoming with us about this. The more he claimed Disney needed animation, the more leverage Pixar might have. But that was his style. With Steve, it worked like magic.

“I like him a lot,” Steve said after the meeting. “What do you guys think?”

“Iger gets Pixar,” Larry said, “and he wants to use Pixar to redesign Disney. This is fantastic.”

I agreed.

At that meeting we floated ideas of how the two companies might work together, ranging from a film distribution agreement as before, to a joint venture, to an outright acquisition by Disney. By the end of the session, all options remained on the table for discussion.

Afterward, it did not take long for the acquisition idea to gain momentum. From Pixar’s side, it came down to two issues. First, as would be typical for any acquisition, was the matter of price. Customarily a buyer will pay a premium for acquiring full control of a company, and there was much room for negotiation on what that premium might be. The second issue was a matter that would be considered unusual for an acquisition, and it became the defining concern in this one. We wanted Disney to agree that Pixar’s operations and culture would be fully allowed to continue to run the way they always had. We had worked incredibly hard to protect and preserve Pixar’s way of doing things, going back all the way to the time when we decided that Pixar’s executives would not intervene with its creative processes. This acquisition had to preserve everything we had worked for; there was no way that we would be willing to do it otherwise.

“Disney has to agree not to change Pixar,” Steve said. “Ed and John have to be on board. They have to believe this is about preserving what we’ve created.”

This, for us, was a deal breaker.

Iger came through immediately. He said that not only did he want to preserve Pixar’s way of doing things, he wanted that way of doing things to infect the culture of Disney Animation so that Disney would become more like Pixar. This was a vision we could all get behind.

The next step was for Pixar’s board of directors to assess Disney’s business and assets to make sure that we could recommend to Pixar’s shareholders that exchanging Pixar stock for Disney stock made good business sense. Along with our advisers and investment bankers, I spent some time at Disney learning about its businesses and financial status. What I discovered made me even more positive about the deal.

The strength of two of Disney’s businesses, in particular, surprised me. These were Walt Disney World and ESPN. These were rock-solid businesses that looked to me as though they were positioned marvelously for years of solid growth. Financially, this made the transaction look even better, an almost perfect fit. Shareholders of Pixar would be exchanging their investment in a highly risky animation company for a diversified investment that included some of the highest-quality media assets in the world, including Disney World, ABC, and ESPN. Those assets would also include Pixar, of course. I returned with a strong recommendation that, financially, this made great sense.

On January 24, 2006, Disney announced it would acquire Pixar for $7.4 billion. Steve still owned just over 50 percent of Pixar, giving his Pixar stock a value of almost $4 billion. In an instant, he became Disney’s largest shareholder. Both Steve and Iger emphasized that the takeover would not threaten Pixar’s culture, and Iger was quoted in the New York Times saying, “It is important that the Pixar culture be protected and allowed to continue.”¹³ John Lasseter became chief creative officer of both Disney Animation and Pixar Animation, and principal creative adviser to Disney’s theme parks. Ed Catmull became president of both studios.

In the ensuing years, the acquisition of Pixar by Disney proved to be one of the most successful corporate acquisitions of its time. Disney’s businesses soared in valuation, almost quadrupling the value of Disney’s stock a few years later. Former stockholders of Pixar enjoyed all the benefits of this run-up in valuation, all the while enjoying diversification into Disney’s range of businesses. Steve was now Disney’s largest stockholder, and the value of his stock in Disney would eventually soar to over $13 billion, making his investment in Pixar by far the largest source of his personal wealth.

Almost overnight, Pixar restored Disney’s dominance in animation, producing a string of hits including Cars, Ratatouille, Wall-E, Up, Toy Story 3, Brave, and Inside Out. Ed and John successfully turned around Disney Animation which, in 2013, released Frozen, which became the highest-grossing animated feature film of all time. Further, Steve, whose health tragically continued to decline, was freed of the burdens of running Pixar. He found in Ed, John, and Iger trusted friends and partners with whom he could share his ideas and advice and enjoy the triumphs that ensued. By every single measure, the acquisition could not have been more successful.

Every single measure, perhaps, except one.

“You seem like you’re down,” Hillary asked, about a week after the acquisition was announced.

“I dunno,” I said. “Maybe a little.”

“How do you feel?”

This was hard for me to admit. Every morsel of the lawyer, CFO, strategist, and board member in me told me the sale of Pixar was the right move, the fitting move, the best possible endgame in this phase of Pixar’s history. Of this I had no doubt. But it also spelled the end of the road for Pixar and me. As soon as Disney bought Pixar, Pixar’s board of directors dissolved, and all my formal ties to Pixar would come to an end. My journey with Pixar was over.

Almost twelve years had passed since that first phone call from Steve. Twelve years in which I hardly remember a day when I didn’t feel responsible for Pixar’s well-being. Even after I left my day-to-day duties, while I was a board member barely a week or two went by without some discussion with Steve that related to Pixar. Worrying about Pixar had been a big part of my life.

“Maybe letting go of Pixar is harder than I thought,” I said.

I wasn’t sure exactly why, though. After all, it was a business; it was a chessboard; it was about making the right moves. I had moved on from other endeavors before. But something about this one was lingering. I felt the way I did when I saw my children off to school for the first time, or went to their graduations. Why was I feeling this way?

Maybe it was because, in many ways, to me Pixar had been like a child: sweet, innocent, playful, and full of wonder and potential. It took a certain amount of vulnerability, humility, and delicacy for Pixar to work. Ed, Steve, John, and I had watched over that. We had poured ourselves into it, pushing each other, learning from each other, helping each other. We had tried all we could to nurture and protect all that made Pixar great.

I remembered those years in Point Richmond, California, where the oil refinery across the street was the most notable way of identifying Pixar’s unremarkable offices, a humble home that belied the wizardry within. I loved how Pixar had revealed itself to its visitors in a series of surprises that would awe them in ways they would not soon forget.

I recalled the challenges over Pixar’s stock option plan, and worrying whether our best people would stay and see Pixar through. I remembered how excited my family had been to attend Toy Story’s premiere, and how we’d all anxiously waited at home for the phone calls that would reveal the opening weekend box office results of Pixar’s films.

I could see myself at the desks of Pixar’s creative and technical wizards for the first time, awestruck at their work. I looked back almost comically at our first meanderings into the entertainment industry and how we had cobbled together our first film financial model. I recalled the way Steve and I had debated every permutation of every possibility that bore on Pixar’s strategy and business.

I remembered the triumph of Pixar’s IPO, and the obstacle course we navigated to make it happen, and I recollected the long, protracted negotiation with Disney that set Pixar on the course of making real profits and becoming a worldwide brand.

Yet now it was all behind me. Pixar was in new hands, safe hands, hands that would take care of it from here on out. No doubt other adventures awaited me, but I guess I was taking one last look back as this one disappeared from my view.

I could not help but think of the way Nemo’s dad, Marlin, felt in that exquisite scene in Finding Nemo when he cannot muster any more strength to continue the search for his son. Marlin’s newfound companion, Dory, in her endearing, quirky, innocent way, says to Marlin, “When life gets you down, you know what you gotta do,” and then in her sweet, rapturous manner she begins to sing:

 

“Just keep swimming.

Just keep swimming.

Just keep swimming, swimming, swimming.”

 

That was exactly what I needed to do.