With that goal, Larry had steadily increased the quality of legal services of the firm until it did, indeed, compete with, and in some cases exceed, the very best in the world. As Silicon Valley grew, the firm grew. If Pixar was to go public, it could not be in better hands than Larry’s.
I made an appointment to see Larry in his office in Palo Alto, not too far from where I lived. Every time I entered that building, I couldn’t help but feel a little nostalgic about my days practicing law. As was his habit, Larry was impeccably dressed, in a well-cut Italian suit and shoes. He was of medium build, trim, fit, with receding hair and was almost twenty years my senior. We quickly got to the point.
“Larry, Steve is pushing hard to take Pixar public,” I started, “and there are good reasons for it, but the risks are enormous.”
“What’s the case for doing it now?” Larry asked.
“We need to finance our own films,” I explained. “That’s the only way we can increase our share of film profits. That’ll take seventy-five million dollars at least. We don’t have to do it now, but the release of Toy Story will give us some wind at our back, and Steve is itching to make the IPO happen. A lot is at stake for him.”
I well knew that Larry understood this. He was also a personal friend and adviser of Steve’s.
“How do you see it? What are the risks?” he asked.
“Pixar’s financial profile is very challenging,” I replied. “We have no earnings track record, revenues are unpredictable, and lumpy, and we have no idea when we might share in more of the film profits. Worse still, after we release Toy Story, it’s three years before our next film.”
“This will all make it a tough sell,” Larry said. “It won’t be easy for the financial markets to know how to think about Pixar.”
“I’m worried about what will happen as investors discover the risks,” I added. “Pixar may be an exciting bet to create the next Disney Animation but the risks are huge. We can’t hide them. But I’m afraid it will scare investors off before we even get started.”
“I agree your best bet is to be as up-front as possible with investors,” Larry said. “Pixar has an exciting story, and with Steve involved you’ll get attention. Investors will figure out the risks anyway. But it’s better if it comes from you up-front. We’ll help you craft that side of the story.”
I was happy with this meeting. Larry would have been the first person to tell me we were crazy to think about taking Pixar public. It didn’t matter that he thought it might be a long shot. I already knew that. But it would matter a lot if he thought we had no shot. With Larry supporting the need to disclose the risks ahead of time, it would be easier to convince Steve, who wouldn’t be ecstatic about sharing the precariousness of Pixar’s business prospects.
I brought the topic up with Steve on the phone that night.
“We’ll have to disclose what we know about Pixar’s business risks up-front,” I said. “Larry says investors will figure it out anyway. It’s better coming from us.”
“If that’s what you both think we have to do, we’ll do it,” Steve said, dismissively.
I could tell he wasn’t against the idea; he just didn’t think it mattered. He was convinced investors would see beyond it, that they would be so enamored with Pixar’s vision that the business risks would be minimized in their eyes. That was fine with me. I got what I wanted: tacit permission to disclose the risks.
I had something else on my mind that night, too.
Steve was the only director on Pixar’s board. We had to expand the board if we were even to think about going public. Any investors would want to know that Pixar had a professional and sophisticated board of directors watching over the company. But I didn’t expect this would be an easy discussion with Steve.
Ten years earlier, Apple’s board of directors had blind-sided Steve by abruptly removing him from his responsibilities at Apple due to his extreme and erratic behavior running the Macintosh division. We never openly talked about it, but the way Steve had insisted on control of Pixar when it came time to issuing stock options made me think he hadn’t entirely recovered from the Apple debacle even now. Even though Steve would own a majority of Pixar, once Pixar was a public company, its board of directors would be accountable to all of Pixar’s shareholders, the minority holders included. This meant that the board would be able to act on its own if it needed to do so. I was quite sure this meant that when it came to selecting Pixar’s board members, Steve was going to be more than a little picky.
“It is also time to expand Pixar’s board of directors,” I suggested. “We need a good board in place long before we go public. We should do it now.”
“I want it to be small,” Steve said. “I don’t like big boards. What’s the smallest you think it could be?”
“I would think five or six would be enough,” I said. “I’ll check with Larry. Let’s assume it can be small.”
“Six is too many,” Steve retorted. “We don’t need six. I also want it to be with people I can work with, people who care about Pixar and aren’t just doing it for the prestige. I don’t want a board with figureheads who know nothing about the company.”
“The board has to give us credibility,” I said. “Investors will look to the board to validate Pixar’s strategy. We can’t just fill it with tech people.”
“I don’t want token Hollywood executives or celebrities,” Steve replied. “We need board members who understand Pixar. Who care about Pixar. People we trust.”
That narrowed the field a lot. It had to be a small board that would give us credibility in Hollywood, made up of people whom Steve knew well and trusted, and who cared about Pixar’s best interests. Enough credibility to satisfy Wall Street; enough intimacy to satisfy Steve. This was going to be a narrow needle to thread.
During the past few months, we had met a number of people who, on paper, would make terrific board members. Edgar Bronfman and Sandy Climan, CEO and COO of Universal Studios, were perfect examples. Most companies would have been thrilled at the possibility that any one of these might join their board of directors. But Steve saw flaws in all of them.
“I like Edgar,” he said, “but do we really want to put the CEO of Disney’s biggest competitor on our board? Sandy Climan would have the same problem.”
The Hollywood executives we knew the best were all from Disney: Michael Eisner, Disney’s CEO, and Peter Schneider, head of Disney Animation. Putting a Disney executive on Pixar’s board now was full of potential conflicts of interest as Pixar navigated its relationship with Disney and even considered relationships with other studios. It wouldn’t work.
There was one more possibility. Sam Fischer, our Hollywood lawyer, had introduced us to one of the senior partners at his firm, Skip Brittenham. Skip was one of a handful of elite Hollywood super-lawyers, counsel to the stars. Sam had insisted we meet him when I’d called to say we wanted to learn more about Hollywood.
Skip was a larger-than-life, charismatic lawyer who seemed to have his hand in much that was going on in Hollywood. He was slightly built, handsome, and mostly bald with long side hair. He dressed in casual suits and had a warm, ingratiating demeanor that made him immediately likable. Skip loved to talk about Hollywood, and there was little he hadn’t seen over the course of his legal career. He was already on Pixar’s side, because his firm represented us.
On the day I met Skip, as I walked into his office, my eye caught an embroidered pillow sitting on a small armchair. On the pillow were carefully stitched words: “No good deed goes unpunished.” Skip saw me notice it and said, “If you understand that, you understand Hollywood.” I was struck by this. The words on the pillow were so cynical. I asked him about it.
“You have to understand,” Skip said, “there’s a reality in Hollywood that will hurt you if you fight it. If you give too much, too soon, you’ll end up giving a lot more. It sounds counterintuitive, but keep it in mind.”
It did not take long to see why Skip Brittenham was a Hollywoo
d super-lawyer, and it wasn’t just because he had a fly-fishing ranch and his own plane to fly there. Skip combined a deep knowledge about the entertainment business and law with an endearing charm that gave him a rare camaraderie with the executives and celebrities he represented. He was able to navigate the seriousness of getting business done with the artistic needs and distinctions of his clients. It was quickly apparent that Pixar, and I, could learn an enormous amount from him.
When we first met Skip, I asked him, “What makes stars rise to the top in Hollywood?”
“People think there’s a lot of luck involved,” he said. “But I don’t think so. You’d be amazed how savvy the top stars are, not just in their art, but in business. It’s no accident that they got where they did. They are very, very sharp.”
Steve and I agreed that Skip would make a terrific board member. Steve asked me to put out a feeler to see if he might be interested. The message came back that he wasn’t. Skip rarely, if ever, sat on boards. I asked if I could speak to him about it. His office arranged a phone call and I talked to Skip from my office at Pixar. Begged would be more accurate.
“Skip,” I started, “I know you don’t do many boards, and I get why. They take up time. You have to travel to board meetings. Plus it’s not the mainstay of your law practice. But this is different. We’re not your typical Hollywood company. We’re born out of Silicon Valley. We’re trying to create this hybrid Silicon Valley–Hollywood company, combining story and technology to do what hasn’t been done in generations. You can really help us.”
“I understand that,” Skip said. “But over the past years I’ve sat on fewer and fewer boards. I can still advise Pixar, as your lawyer. It’s too much hassle for me to be on the board. Besides, you’re up in Northern California, far from here.”
Skip was our last possibility for a Pixar board member from Hollywood. We really needed this one. I could tell that it wasn’t Pixar’s inherent risks that were scaring Skip off. It was just the inconvenience. I had to keep trying.
“Skip,” I pleaded, “being our lawyer would be fantastic, but we need more. As a board member you’d be invaluable to Pixar’s future, and to Steve’s. We’re trying to be the first company in two generations to change the world of animated feature films. Steve really wants to work with you. We need your help. If we make it, it’ll be fantastic to have you be part of it. If not, you can quit the board and you wouldn’t have lost much. I’ll do everything in my power to make it less hassle for you.”
“Let me think about it,” Skip said.
Two days later Skip called Steve to say he’d love to join Pixar’s board.
I wasn’t sure what changed his mind. Perhaps it was my desperation. Perhaps he saw in Pixar an opportunity he wanted to be part of. Perhaps he was intrigued by the idea of working with Steve Jobs. They had certainly hit it off. Either way, he signed up.
One down.
That was as far as I could push Steve in terms of board members whom he did not already know really well. Steve floated the idea that we ask Joe Graziano, Apple’s CFO during Steve’s time there, to join. He wanted me to meet him. Joe came over to Pixar, where I gave him a tour and we chatted about Pixar’s business. I liked Joe right away. He was warm, friendly, very smart, and had a penchant for racing cars that was fun to discuss. It didn’t take him long to catch on to what Pixar was up against. Fortunately, Joe was at a stage in his career when he liked taking risks with start-ups. He didn’t need Pixar to be a sure thing. He seemed like he would be a loyal and steady hand to help us.
Counting Steve, we now had three board members. We needed one or two more. For me there was one person whom I really wanted to see on Pixar’s board: Larry Sonsini.
Larry had not just been a close friend and adviser to Steve over the years; he was known to be a brilliant board member. I couldn’t imagine anyone better to help guide us through the thicket of going public and beyond. He met all of Steve’s criteria. Steve made the call to ask him. Larry agreed.
Now we had four: Steve Jobs, Skip Brittenham, Joe Graziano, and Larry Sonsini. These would all be fantastic. They were all heavy hitters in their fields, and they would give Pixar much-needed credibility. This was a very small board, though. I was worried we needed more members, but Steve didn’t want to add more. I asked Larry if four was enough.
“Yes,” he said. “You can add more later, when you’re ready.”
We had our board. Now we could explore an IPO in earnest.
All roads to taking a company public led through the rarefied world of investment banking. The real IPO game would begin when Pixar began its search for an investment banker. If I thought Steve was picky when it came to selecting Pixar’s board of directors, that was nothing compared to how he felt about investment bankers.
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 St
anley 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.
To Pixar and Beyond Page 12