WEBVTT 1 00:00:08.255 --> 00:00:12.425 Welcome to this Vidcast, which is devoted to Pixar, 2 00:00:12.505 --> 00:00:16.825 a company whose creativity in animation films has been a 3 00:00:16.825 --> 00:00:21.065 source of so many dreams for such a diverse public. 4 00:00:21.885 --> 00:00:25.905 We are going to concentrate on the year 2006 when the 5 00:00:25.905 --> 00:00:27.625 company is acquired by Disney. 6 00:00:28.605 --> 00:00:32.145 As far as shareholders are concerned, Pixar shareholders, 7 00:00:32.485 --> 00:00:34.305 was it the right moment for sale? 8 00:00:36.495 --> 00:00:39.185 Obviously, Pixar represented a disruption, 9 00:00:39.385 --> 00:00:42.705 a main disruption in the animation film industry. 10 00:00:43.565 --> 00:00:47.585 For Steve Jobs, it was the best financial investment ever 11 00:00:47.965 --> 00:00:51.385 and Steve Jobs made much more money with Pixar than 12 00:00:51.385 --> 00:00:55.305 with Apple and for Disney it was a turnaround, 13 00:00:55.805 --> 00:00:58.185 the opportunity for a revival, 14 00:00:58.185 --> 00:01:00.705 which was absolutely crucial for the company. 15 00:01:02.245 --> 00:01:05.915 Let's go back to the early years of Pixar. At the beginning. 16 00:01:05.925 --> 00:01:09.675 There is an outstanding director, George Lucas 17 00:01:10.055 --> 00:01:13.435 and George Lucas is going to create his own company, 18 00:01:13.995 --> 00:01:16.315 Lucas Film, to produce his own films. 19 00:01:17.375 --> 00:01:21.995 Inside Lucas's film is going to create in 1979 the computer 20 00:01:22.635 --> 00:01:23.635 graphics group. 21 00:01:24.335 --> 00:01:28.195 The objective is to create visual effects for films such 22 00:01:28.195 --> 00:01:29.235 as Star Wars. 23 00:01:29.945 --> 00:01:33.315 He's going to invite pioneers to join the venture, 24 00:01:33.985 --> 00:01:35.035 including Dr. 25 00:01:35.475 --> 00:01:38.955 Edwin Kamal, who is a genius in computer science. 26 00:01:39.545 --> 00:01:43.075 He's going to receive plenty of prestigious awards such 27 00:01:43.075 --> 00:01:46.035 as John Neuman and the Touring Awards, 28 00:01:46.575 --> 00:01:48.355 and his career will end as a president 29 00:01:48.355 --> 00:01:51.035 of Wal Disney Animation Studios. 30 00:01:52.695 --> 00:01:54.355 At a certain moment in time, 31 00:01:54.565 --> 00:01:57.195 there will be a certain actor showing on stage. 32 00:01:58.175 --> 00:02:03.035 In May, 1985, Steve Jobs ousted from Apple. 33 00:02:03.655 --> 00:02:05.715 He was more or less forced to resign 34 00:02:05.715 --> 00:02:10.275 after a conflict with John Sculley hired by Steve Jobs 35 00:02:10.895 --> 00:02:14.235 and Conflict, which is confirmed with the board of directors 36 00:02:14.235 --> 00:02:16.915 of Apple Co-founded by Steve Jobs 37 00:02:17.495 --> 00:02:19.715 and Steve Wozniak at that time. 38 00:02:19.715 --> 00:02:24.435 Steve Jobs sells all of his 11% shares of Apple, 39 00:02:24.825 --> 00:02:27.155 excluding one share to be invited 40 00:02:27.295 --> 00:02:28.355 for the shareholders meeting, 41 00:02:29.415 --> 00:02:32.835 and it's not quite sure how much he got out of that, 42 00:02:32.975 --> 00:02:37.395 but some estimations are about $130 million. 43 00:02:37.625 --> 00:02:39.595 What did he do with the money it created? 44 00:02:40.385 --> 00:02:44.275 Next, the next adventure, the objective is 45 00:02:44.275 --> 00:02:47.715 to defeat Apple to take his revenge against Apple. 46 00:02:48.375 --> 00:02:49.795 The computers created 47 00:02:49.975 --> 00:02:52.995 and produced by Next are not going to be a massive success, 48 00:02:53.095 --> 00:02:56.635 but the operating system, which is based on Unix, is going 49 00:02:56.635 --> 00:02:57.635 to be a great success 50 00:02:58.095 --> 00:03:02.205 and when next later on is bought by Apple, it's going 51 00:03:02.205 --> 00:03:04.245 to be Mac OSX. 52 00:03:06.505 --> 00:03:07.965 The second investment made 53 00:03:07.985 --> 00:03:10.605 by Steve Jobs is an investment in Pixar. 54 00:03:11.455 --> 00:03:14.285 Steve Jobs first makes an offer, which is rejected 55 00:03:14.505 --> 00:03:17.365 by the management of the company. 56 00:03:18.035 --> 00:03:21.005 Then the management tries to find another investor 57 00:03:21.635 --> 00:03:24.285 they don't find and then they go back to Steve Jobs 58 00:03:24.585 --> 00:03:25.605 who accepts the offer. 59 00:03:26.275 --> 00:03:28.125 He's going to be paid $1 per month. 60 00:03:28.475 --> 00:03:30.485 He's going to invest $5 million 61 00:03:30.585 --> 00:03:32.845 to buy the computer graphics groups, 62 00:03:33.265 --> 00:03:36.685 and he's going to inject an additional 5 million to pay 63 00:03:36.685 --> 00:03:38.805 for the losses and create some 64 00:03:39.445 --> 00:03:40.565 invested capital in the company, 65 00:03:40.565 --> 00:03:43.645 which is renamed Pixar Animation Studios. 66 00:03:44.395 --> 00:03:48.205 What is of first interest for Steve Jobs is 67 00:03:48.205 --> 00:03:52.725 that Pixar is selling a Pixar, an image computer, 68 00:03:53.465 --> 00:03:57.525 and the objective of Steve Jobs is to fight against Apple. 69 00:03:58.095 --> 00:04:00.405 Again, the revenge against Apple. 70 00:04:01.065 --> 00:04:05.565 The copywriter is sold for just $135,000 71 00:04:05.945 --> 00:04:09.765 at that time, to which you have to add $35 for the software, 72 00:04:09.765 --> 00:04:12.925 which is acquired on both from Sun Systems. 73 00:04:13.425 --> 00:04:15.725 That's quite a high amount of money 74 00:04:16.105 --> 00:04:18.765 and it's going to be a complete commercial disaster. 75 00:04:18.955 --> 00:04:21.445 They're going to sell less than 300 units. 76 00:04:21.585 --> 00:04:24.725 Of course, if you compare that with Apple One, 77 00:04:25.135 --> 00:04:28.845 which had been sold 175 times, it looks better, 78 00:04:29.225 --> 00:04:32.245 but Apple two, which followed Apple one, 79 00:04:32.825 --> 00:04:36.245 was sold at the level of 6 million units, 80 00:04:36.375 --> 00:04:38.005 which is a quite different story. 81 00:04:39.425 --> 00:04:42.725 In the meantime, there is a third actor who's working hard. 82 00:04:43.075 --> 00:04:47.965 John Lasseter, whose creativity is outstanding, is using 83 00:04:48.145 --> 00:04:51.045 and capitalizing on the right software, which was developed 84 00:04:51.145 --> 00:04:55.765 by Pixar to produce very successful animated shortcuts 85 00:04:56.265 --> 00:04:59.005 who are going to receive recognition from the industry 86 00:04:59.035 --> 00:05:01.165 with a nomination at the Huska. 87 00:05:02.155 --> 00:05:04.485 John Lasseter also has good ties with Disney, 88 00:05:04.865 --> 00:05:06.605 and thanks to that they are going 89 00:05:06.605 --> 00:05:09.485 to sign a partnership in 1991 90 00:05:10.295 --> 00:05:12.845 about producing films distributed by Disney. 91 00:05:13.665 --> 00:05:16.005 The rest of the stories are going to be a succession 92 00:05:16.005 --> 00:05:20.445 of tensions, conflicts, terrible meanings, insults, 93 00:05:20.465 --> 00:05:22.485 and so on and so forth, and after four 94 00:05:22.485 --> 00:05:25.125 and a half years of hard work 95 00:05:25.385 --> 00:05:30.325 and difficulties, toy Story is going to be produced in 96 00:05:30.965 --> 00:05:35.485 1995 and it's going to be immediately fantastic success 97 00:05:35.595 --> 00:05:40.165 with more than $360 million of revenues at the box office. 98 00:05:41.085 --> 00:05:44.725 Capitalizing on that, Pixar is going to go public. 99 00:05:45.205 --> 00:05:49.365 IPO is going to happen in November, 1995, 100 00:05:49.465 --> 00:05:51.205 and it's going to be immediately great 101 00:05:51.205 --> 00:05:53.245 success in half an hour. 102 00:05:53.745 --> 00:05:58.205 The stock price is going to move from $22 to $45 103 00:05:58.625 --> 00:06:00.405 and it's going to end at a level 104 00:06:00.505 --> 00:06:03.645 of 14 $9.50 for the period. 105 00:06:04.825 --> 00:06:08.485 At that time, the Pixar stock market value market 106 00:06:08.545 --> 00:06:10.565 capitalization is $2 billion, 107 00:06:11.305 --> 00:06:14.965 and this is slightly more than Apple for the period, 108 00:06:15.575 --> 00:06:20.485 which is the revenge for Steve Jobs later on. 109 00:06:20.485 --> 00:06:23.205 The evolution of the revenues generated by Psar 110 00:06:23.945 --> 00:06:26.125 is a consequence of success stories in the 111 00:06:26.125 --> 00:06:27.325 production of films. 112 00:06:28.425 --> 00:06:32.325 If you observe the period from 94 to 2005, 113 00:06:32.835 --> 00:06:36.365 revenue start at a very low negligible level. 114 00:06:36.745 --> 00:06:40.245 96, it's about $30 million as a consequence 115 00:06:40.245 --> 00:06:42.205 of Toy Story one. 116 00:06:42.715 --> 00:06:44.445 Then there will be a stabilization 117 00:06:45.145 --> 00:06:48.525 and really as a starting point is 99 with Bug's Life. 118 00:06:49.475 --> 00:06:54.205 Then Toy Story number two, monsters is going 119 00:06:54.205 --> 00:06:57.805 to be created and produced in 2001. 120 00:06:58.355 --> 00:07:01.325 It's going to produce all its effects in 2002, 121 00:07:02.185 --> 00:07:06.525 and then the revenues generated by Pixar are $200 million. 122 00:07:07.025 --> 00:07:10.285 In 2005, it's almost 300 million. 123 00:07:11.115 --> 00:07:13.005 What is interesting to observe is 124 00:07:13.005 --> 00:07:15.405 that their revenues are dramatically up, 125 00:07:15.945 --> 00:07:17.605 but there seems to be at the beginning 126 00:07:17.605 --> 00:07:22.525 of a plateauing in 2005 as opposed to 2004 127 00:07:23.185 --> 00:07:27.525 growth, but slowing down for the shareholders 128 00:07:27.985 --> 00:07:31.085 of Pixar, there is not much of a slowing down. 129 00:07:32.225 --> 00:07:35.965 You remember that in 2001, 2002, 130 00:07:36.255 --> 00:07:38.445 there was the explosion of the internet bubble 131 00:07:38.585 --> 00:07:41.325 and NASDAQ went down by more than 50%. 132 00:07:41.905 --> 00:07:45.165 In the meantime, because of the success of the stories 133 00:07:45.765 --> 00:07:48.645 produced by Pixar, the stock price is going 134 00:07:48.645 --> 00:07:50.445 to keep on going up, 135 00:07:51.055 --> 00:07:53.485 which is a tremendous success for the company. 136 00:07:54.825 --> 00:07:58.125 As a matter of fact, Pixar is combining growth 137 00:07:58.665 --> 00:08:02.565 and performance, which is a key for value creation, 138 00:08:02.785 --> 00:08:05.965 but there are some early longing signals. 139 00:08:07.425 --> 00:08:09.645 Of course, if you look at the money which is invested 140 00:08:09.665 --> 00:08:12.485 by the capital in its development there, 141 00:08:12.625 --> 00:08:14.165 no stop, no plateau. 142 00:08:14.755 --> 00:08:18.485 Capital expenditures represent $10 million on the average 143 00:08:18.485 --> 00:08:19.525 throughout the years 144 00:08:19.955 --> 00:08:22.805 because now the industrial manufacturing 145 00:08:22.955 --> 00:08:24.125 footprint is available. 146 00:08:24.945 --> 00:08:28.965 The amount of money invested in field production keeps on 147 00:08:29.195 --> 00:08:32.605 growing from 30 million in 2000 148 00:08:33.145 --> 00:08:35.925 to 70 million in 2005. 149 00:08:37.565 --> 00:08:40.805 I already mentioned that revenue growth was slowing down. 150 00:08:41.235 --> 00:08:44.885 What about the performance performances return on capital 151 00:08:45.245 --> 00:08:47.445 employed, which is a combination of return on sales 152 00:08:47.705 --> 00:08:50.445 and assets, productivity, assets, turnover? 153 00:08:51.845 --> 00:08:54.565 Interestingly, what is happening in the return capital, 154 00:08:54.800 --> 00:08:59.685 capital is growing, increasing Verage from 2001 to 2004, 155 00:09:00.105 --> 00:09:04.045 and then there's a little bit of getting down in 2005. 156 00:09:04.425 --> 00:09:06.765 Why? Because both commercial profitability 157 00:09:07.265 --> 00:09:11.005 and assets productivity are getting a little bit down. 158 00:09:11.865 --> 00:09:15.725 Of course, the return on capital is between 55 159 00:09:15.865 --> 00:09:19.005 and 60%, which is still quite outstanding, 160 00:09:19.545 --> 00:09:21.045 but there's a kind of the beginning 161 00:09:21.045 --> 00:09:25.205 of a plateauing in the return on capital, which is combined 162 00:09:25.205 --> 00:09:28.365 with a slowing down in the growth in the revenues. 163 00:09:30.545 --> 00:09:33.685 The good news is at a small reduction in the return capital 164 00:09:34.005 --> 00:09:36.125 employee does not show in the stock price. 165 00:09:37.195 --> 00:09:41.165 Rose went up from 2001 20% 166 00:09:41.465 --> 00:09:45.965 to 2004, 2005, 55, 60%, 167 00:09:47.225 --> 00:09:49.845 and the market to book enterprise value divided 168 00:09:49.905 --> 00:09:52.525 by capital employed, which is a market credibility. 169 00:09:52.665 --> 00:09:56.005 The relative value creation of the company is up 170 00:09:56.705 --> 00:09:59.245 in 2002, the market book is five. 171 00:09:59.985 --> 00:10:03.245 In 2004, it is about nine, 172 00:10:03.385 --> 00:10:06.125 but in 2005 it's more than 11, 173 00:10:06.905 --> 00:10:09.965 so the market is not penalizing at all. 174 00:10:10.255 --> 00:10:13.805 Pixar for the slowdown in their revenues 175 00:10:14.265 --> 00:10:18.725 and the plateauing of the return capital 2004, 176 00:10:18.725 --> 00:10:22.085 2005 is really a dec moment for Pixar. 177 00:10:22.865 --> 00:10:26.285 The company had signed an initial contract, an agreement 178 00:10:26.355 --> 00:10:29.565 with Disney for distribution in 1991. 179 00:10:30.535 --> 00:10:34.085 Later on, the initial contract had been renewed, amended, 180 00:10:34.145 --> 00:10:38.125 and so on so forth, but Steve Jobs now wants to quit Disney 181 00:10:38.465 --> 00:10:40.765 and there are strong disagreements between Steve Jobs 182 00:10:41.185 --> 00:10:43.285 and Michael Eisner, the head of Disney. 183 00:10:44.195 --> 00:10:48.005 They both have a quite relatively high ego. 184 00:10:48.675 --> 00:10:51.485 Then as a consequence, negotiations are interrupted, 185 00:10:51.785 --> 00:10:54.805 but they will start again under the leadership of Bob Iger, 186 00:10:54.805 --> 00:10:58.205 Michael Eisner successor as they are going 187 00:10:58.205 --> 00:11:00.445 to reach an agreement in January, 2006. 188 00:11:00.635 --> 00:11:04.725 This nearby PIX up for $7.4 billion. 189 00:11:05.355 --> 00:11:07.245 It's an all stock transaction, 190 00:11:07.945 --> 00:11:11.205 and at that time, Steve Jobs owns a little bit less than 50% 191 00:11:11.205 --> 00:11:15.005 of Pixar, exactly 49.65%, 192 00:11:15.625 --> 00:11:19.645 so he's going to receive Disney shares exactly 7% 193 00:11:19.645 --> 00:11:20.645 of Disney shares, 194 00:11:20.865 --> 00:11:24.485 and he's going to become the largest shareholder at Disney, 195 00:11:25.115 --> 00:11:27.605 much ahead of Michael Eisner, 196 00:11:28.105 --> 00:11:30.645 who has only 1.7%, 197 00:11:31.025 --> 00:11:35.965 and Roy Disney, Wal Disney's browser with 1% of the shares. 198 00:11:37.995 --> 00:11:40.645 It's quite interesting to spend a moment observing 199 00:11:40.905 --> 00:11:43.685 and discussing the financial metrics of the acquisition. 200 00:11:44.745 --> 00:11:48.325 You know that you can calculate multiples enterprise value 201 00:11:48.345 --> 00:11:50.605 and ebitda, enterprise value and revenues, 202 00:11:51.185 --> 00:11:54.180 but you can base this calculation on the enterprise value, 203 00:11:54.180 --> 00:11:58.045 which you observe on the average in 2005 204 00:11:58.305 --> 00:12:00.645 or the acquisition enterprise value 205 00:12:01.575 --> 00:12:03.845 based on the average 2005, 206 00:12:03.975 --> 00:12:07.805 enterprise value represents 21 years of EBITDA 207 00:12:07.805 --> 00:12:12.525 and 16 years of revenue, which is a consequence of an EBITDA 208 00:12:12.545 --> 00:12:16.965 to revenues, which is 75%, so 21 years 209 00:12:16.965 --> 00:12:18.245 of EBITDA for a company 210 00:12:18.315 --> 00:12:21.925 with an outstanding commercial performance, good prospect 211 00:12:21.945 --> 00:12:23.685 for growth is quite reasonable. 212 00:12:24.425 --> 00:12:27.125 34 years of EBITDA is 213 00:12:27.665 --> 00:12:30.325 the enterprise value based on the acquisition price 214 00:12:30.625 --> 00:12:34.845 and 26 years of revenues that starts being quite high. 215 00:12:35.745 --> 00:12:37.645 Now you remember, you can calculate the market 216 00:12:37.865 --> 00:12:40.925 to book enter price value divided by capital employed, 217 00:12:41.355 --> 00:12:43.445 putting no growth in a calculation. 218 00:12:43.465 --> 00:12:46.445 You get to a figure theoretical figure of four, 219 00:12:47.185 --> 00:12:50.765 you calculate that dividing the OSA after tax by the wac. 220 00:12:51.385 --> 00:12:54.965 Now you can confront these four times market 221 00:12:54.985 --> 00:12:58.405 to book no growth with the act hole, which is 18, 222 00:12:59.065 --> 00:13:02.085 and then you understand that there is a huge growth rate 223 00:13:02.625 --> 00:13:06.325 in the stock price in the acquisition enterprise value, 224 00:13:06.735 --> 00:13:09.245 which is no more in a p and l. 225 00:13:11.245 --> 00:13:13.495 Then you understand that the financial metrics 226 00:13:14.275 --> 00:13:18.455 of the acquisition are quite outstanding for a company 227 00:13:18.845 --> 00:13:21.975 with revenues are showing some early signs 228 00:13:21.995 --> 00:13:24.015 of potential slowdown. 229 00:13:25.525 --> 00:13:27.495 It's also quite interesting to observe 230 00:13:27.755 --> 00:13:30.055 how this name managed the integration. 231 00:13:30.875 --> 00:13:34.415 Of course, the two companies merged on a legal point of view 232 00:13:34.415 --> 00:13:36.935 and an accounting point of view on a financial point 233 00:13:36.935 --> 00:13:40.935 of view, but as far as organizations are concerned, 234 00:13:40.935 --> 00:13:42.575 they stayed away from each other. 235 00:13:43.265 --> 00:13:46.935 There were still two organizations, Pixar on the one hand, 236 00:13:47.355 --> 00:13:51.655 Disney Animation Studios on the other hand, interestingly, 237 00:13:51.845 --> 00:13:54.615 they were sharing the same chief creative 238 00:13:54.615 --> 00:13:56.135 officer, John Lasseter. 239 00:13:56.315 --> 00:13:59.775 Of course, they had the same president, Edwin Kamo 240 00:13:59.955 --> 00:14:02.175 of course, but two separate teams 241 00:14:02.835 --> 00:14:06.255 and no possibility of poaching, which means 242 00:14:06.255 --> 00:14:09.975 that if one team has a problem, they cannot take 243 00:14:10.725 --> 00:14:13.375 good animator creator and so on 244 00:14:13.375 --> 00:14:15.935 and so forth from the other organizations, they have 245 00:14:15.935 --> 00:14:18.135 to solve their problems by themselves. 246 00:14:19.105 --> 00:14:22.095 Pixar stayed in Emeril, California, 247 00:14:22.835 --> 00:14:25.175 and when a film is produced, there's a kind 248 00:14:25.175 --> 00:14:28.295 of cool branding, which is Disney, Pixar. 249 00:14:30.035 --> 00:14:32.735 As far as film production is concerned, the rest 250 00:14:32.735 --> 00:14:34.215 of the story is a dream list. 251 00:14:34.605 --> 00:14:36.615 Finding Nemo cars, right? 252 00:14:36.615 --> 00:14:40.615 Tattoo, honestly my favorite Incredibles 253 00:14:41.035 --> 00:14:43.015 inside out, et cetera. 254 00:14:43.755 --> 00:14:46.695 Of course, there was the original films plus plenty 255 00:14:46.915 --> 00:14:50.455 of swells to manage the return investment. 256 00:14:51.745 --> 00:14:54.525 As far as recognition is concerned, the company 257 00:14:55.485 --> 00:14:59.085 received plenty of awards, 23 Academy Awards 258 00:14:59.265 --> 00:15:03.125 or Scars, including 11 for the best animation film, 259 00:15:03.705 --> 00:15:07.805 10 Golden Globe Awards, 11 Grammy Awards, 260 00:15:08.585 --> 00:15:11.525 and all in all it represents about today, 261 00:15:11.635 --> 00:15:14.125 $15 billion at the box office. 262 00:15:14.865 --> 00:15:18.045 If you remember that the acquisition price was 7.4 billion. 263 00:15:18.835 --> 00:15:23.565 It's about two multiplied by the acquisition price of Pixar, 264 00:15:25.315 --> 00:15:27.935 so of course it's an outstanding story. 265 00:15:28.165 --> 00:15:29.855 It's an exceptional story, 266 00:15:30.555 --> 00:15:34.415 and it's a path which was dotted with pitfalls, noise, 267 00:15:35.415 --> 00:15:36.975 conflict, and so on and so forth. 268 00:15:38.755 --> 00:15:41.935 But now the new challenge, which is made by Pixar 269 00:15:42.155 --> 00:15:45.615 and Disney, is about a spectacular weariness. 270 00:15:46.515 --> 00:15:49.815 You can create Toy Story number 25, 271 00:15:50.675 --> 00:15:53.415 but at the end of the day it's a little bit of repetition 272 00:15:53.795 --> 00:15:56.735 and there is a threat that spectators considers 273 00:15:56.735 --> 00:15:59.575 that there is no more originality in the films. 274 00:16:00.515 --> 00:16:03.255 It does not show today in the box office 275 00:16:03.255 --> 00:16:08.015 because inside out number two, which was produced in 2024, 276 00:16:08.115 --> 00:16:12.935 so this year generated revenues of $1.7 billion, 277 00:16:13.155 --> 00:16:15.815 so it's great, but what about the future? 278 00:16:17.255 --> 00:16:19.895 Probably the company will have to balance between sequels 279 00:16:19.995 --> 00:16:24.655 for the rich and investment, but also original characters, 280 00:16:25.315 --> 00:16:28.375 and of course this is much more risky. 281 00:16:29.435 --> 00:16:31.615 Now the question is Lasseter 282 00:16:31.875 --> 00:16:35.175 and Cat Mill are no more working in the company, 283 00:16:36.195 --> 00:16:40.135 so the challenge is going to be really able to replace them. 284 00:16:40.715 --> 00:16:42.535 That's the real challenge 285 00:16:42.595 --> 00:16:45.255 for Pixar slash Disney in the future. 286 00:16:46.185 --> 00:16:47.015 Thank you very much.