To Pixar and Beyond

by Lawrence Levy

  “This is going really well, Steve,” I said shortly after we heard Cowen and Company was on board. “Between Robertson Stephens and Cowen, we can get this done.”

  “I hope so,” said Steve, “but we still need a third banker. What do you think of Hambrecht and Quist?”

  Like Robertson Stephens, Hambrecht and Quist was a well-known boutique investment bank in Silicon Valley. They had been involved with Apple’s IPO in 1980, playing second position behind the lead, Morgan Stanley. Steve knew their CEO, Dan Case, who had started talking to Steve about Pixar. Steve had not considered Hambrecht and Quist to lead our deal, but he thought it might be a good idea to have them involved.

  “They’d be great,” I said. “They’re another tech bank so they won’t help much on the entertainment front. But we’ve got that covered well enough. Let’s go for it.”

  It didn’t take long to get them on board. With that, we had our investment banking team: Robertson Stephens as the lead, Hambrecht and Quist second, Cowen and Company in third position. Now the real work would begin.

  “We have a chance to make this happen,” I said to Hillary one night toward the end of August. “I’ll be out of commission working on this for the next couple of months. But this is our shot.”

  “Steve’s ready for it too?” Hillary asked.

  “Yes, he’s on board. Ready to go. Even excited I would say.”

  “Good luck,” Hillary said. “This is the chance you’ve been hoping for.”

  We’d need that luck. Actually pulling off an IPO was going to be a lot harder than finding investment banks. We would now begin endless meetings with the bankers as they pored over every single detail of Pixar’s history, financial information, and business plan. There would be teams of lawyers and accountants checking, double-checking, and triple-checking compliance with every nuance and requirement of the securities laws. There would be continuous discussions and debates over how to value Pixar, how to price its stock, and the exact timing for taking it public.

  Most of all there would be the crafting of the document around which the entire transaction would pivot: Pixar’s prospectus. This mind-numbingly detailed legal document would be filed with the SEC and then delivered to every potential investor. The prospectus would disclose in painstaking detail every facet of Pixar’s business, qualitatively and quantitatively, and would contain page after page of discussion of the risks that every investor should know about. It would describe Pixar’s history, vision, business plan, technology, animation and production processes, competition, risks, executives, board members, stock ownership, stock option plan, and countless other details relevant to understanding the company. It would be as long as a book and take many weeks and many nights in a room full of investment bankers and lawyers to craft its every word. After that, it would be subject to the comments of the SEC to which we would have to respond in detail. If anyone along the way—investment bankers, lawyers, accountants, or the SEC—was not happy with that prospectus, there would be no public offering.

  But this was exactly the shot I had hoped we would have. It was now approaching a full year since Steve had first called me. Pixar’s IPO had been foremost on his mind from day one, and here we were, after a roller coaster of twelve months, ready to roll up our sleeves and see if we could actually get this done.

  15

  Two Numbers

  Steve once told me that the gestation of great products takes much longer than it appears. What seems to emerge from nowhere belies a long process of development, trials, and missteps. If anything proved that case, it was Pixar. The gestation of Toy Story could be traced back sixteen years to when Pixar had been the computer graphics division at Lucasfilm. It had been a long and arduous path since then, with no end of challenges. This made it especially ironic that in one week in November of 1995, Pixar’s entire future would depend on just two numbers: the opening weekend box office for Toy Story, and the price at which Pixar’s shares sold in its IPO.

  The first number, the opening weekend box office for Toy Story, would tell us how well Toy Story would perform overall. It was scheduled for release on November 22, the Wednesday before Thanksgiving, and Disney told us it could make a good prediction of the opening weekend box office, and indeed the film’s overall performance, solely on the basis of that week’s Friday night box office performance.

  This meant that after all those years of evolving the technology and then four more years of actually making Toy Story, Pixar would learn on a single Friday night in November what the world thought of its work. It reminded me of the hundred-meter sprint in the Olympic Games. A lifetime of training to become the fastest runner in the world came down to a single ten-second performance. If the world fell in love with Toy Story, Pixar would have a chance to usher in a new era of animated entertainment. If it didn’t, Pixar might be written off as another company that tried but never quite hit the mark.

  “What opening weekend box office would make you feel really good?” Steve asked me as we were taking a walk in Palo Alto one Saturday afternoon.

  “Anything above ten million,” I said. “Even if we hit eight million we’re on the board.”

  “My number’s fifteen,” Steve said. “If we hit fifteen to twenty, they’ll project a total domestic box office of over a hundred million. Then no one will question Pixar’s arrival.”

  This was the umpteenth time we’d had this discussion. We loved to speculate about Toy Story’s box office potential and what it meant. A domestic box office run—meaning the total North American ticket sales—of $100 million would be sweet indeed. It was a magic number in the film business, and very difficult to achieve, even more so in animation. In all of film history, only four animated feature films had a domestic box office greater than that, and all of those had been made by Disney: Beauty and the Beast, Aladdin, The Lion King, and Pocahontas.4

  After Disney, the dropoff was precipitous. Only three non-Disney animated feature films had achieved a domestic box office at or around $50 million: Universal’s An American Tail in 1986 and The Land Before Time in 1988, and Tim Burton’s The Nightmare Before Christmas in 1993. In fact, in the past five years, if you excluded the four Disney blockbusters, of the seventeen other animated feature films released by major studios or well-known independents, the average domestic box office was a little under $14 million. That’s total domestic box office, not the opening weekend. In animation, for all practical purposes, Disney had been the only game in town for over fifty years. In an environment this harsh, what would it take for Pixar to claim victory?

  It was almost ludicrous to bet Pixar’s success on its first film doing something no other studio had done besides Disney. We needed another standard. Tim Burton’s The Nightmare Before Christmas seemed a good one. It had quite a few parallels with Toy Story. Released in 1993, the film had enjoyed rave reviews, was made using a nontraditional technology called stop-motion animation, and was distributed by Buena Vista Distribution, Disney’s film distribution company. Originally slated to be released under the Disney banner, it had been shifted to Disney’s Touchstone Pictures banner for fear that some of the content was a little dark. It had scored $50 million in the domestic box office (which went up to $75 million after its rerelease years later). At least if Toy Story did $50 million, we could claim the same respectability as The Nightmare Before Christmas.

  “What about The Nightmare Before Christmas?” I reminded Steve. “We would hardly be in poor company if we performed as well.”

  “I love Tim Burton’s work,” Steve replied. “It’s no shame to do fifty million. Crossing a hundred would put us in a different league, though.”

  For a total domestic box office of over $100 million, Toy Story would need an opening weekend in the $15 to $20 million range. Excluding the four Disney blockbusters, the average opening weekend for animated feature films during the past five years was under $3 million. No matter how we measured it, we were reaching for the sky.

  The second number that wou
ld define Pixar’s future was the price at which Pixar’s stock would start trading as a public company. The moment Pixar went public, its stock would begin to trade on the NASDAQ stock exchange—a computerized trading system on which most Silicon Valley IPOs were launched. Of all the issues in Pixar’s public offering, there were none that occupied Steve’s thinking more than what Pixar’s stock would sell for when it first went public.

  The first stock price was the price at which Pixar sold stock to investors. We were planning on selling roughly six million shares of stock. If the stock price was $10, we would raise $60 million. If it were $20, we would raise $120 million, and so on. After that moment, those six million shares would be in the hands of investors, and they would be free to buy and sell shares among each other just like any other publicly traded stock. It was that first sale that determined how much Pixar itself received.

  The price of Pixar’s stock as it traded in the market after that first sale would also be important. It would determine the total value of the company at any given moment in time—and the total value of Steve’s holdings as well as the stock options held by Pixar’s employees. Given the total number of shares of Pixar stock that existed, if Pixar’s stock traded at $10 per share, Pixar would be worth about $370 million, and Steve’s 80 percent share around $300 million. If it traded at $20 per share, Pixar would be worth $740 million and Steve’s portion around $600 million. In other words, Pixar’s stock price at the end of its first day of trading would not just signify Steve’s comeback, it would quantify it.

  The way the first stock price—the price at which Pixar’s stock was initially sold to investors—would be determined was as much art as science. When Pixar filed its prospectus with the SEC, it would include a proposed price for Pixar’s first sale of stock. That proposed price would be our investment bankers’ indication of a fair value for investing in Pixar. All the tire-kicking work that the investment bankers went through was to establish that one number. Until Pixar’s stock actually started to trade, that proposed price would be the so-called definitive number on Pixar’s value.

  However, it was just a proposed price, the number that the investment bankers thought investors should be willing to pay for Pixar stock. The actual number would not be determined until the first day of stock trading, which wouldn’t happen until weeks after our SEC filing. During that time we would be hitting the road to meet investors, and their level of interest would indicate whether the actual first sale of Pixar stock should be at, above, or below the proposed price. In Netscape’s recent IPO, for example, the proposed price had been around $14 per share, and after its road show the opening price had been double that, $28 per share. In the first few hours of trading, the stock price had doubled again.

  On the IPO road show we would spend a little over two weeks in San Francisco, Los Angeles, New York, Boston, London, and a few other cities, going from office to office telling our story to potential investors. Sometime after each visit, the investors would let our investment banks know their level of interest in Pixar. Once the investment bankers saw the actual level of interest from investors, they would adjust the opening price accordingly. If investors were wildly excited, the opening price would go up from the proposed price. If interest waned, it would go down. If it really plummeted, they could even cancel the IPO.

  Setting the proposed price for an IPO was a very delicate balancing act. The lower the stock price at the opening of Pixar’s IPO, the less funds Pixar would raise from selling its stock, but the higher investor demand would be. On the other hand, the higher the stock price at the opening, the more funds Pixar would raise, but the risk was that investor demand might be lower, thereby putting downward pressure on the price. These were numbers that Steve and I discussed incessantly.

  “We’re worth more than Netscape,” Steve asserted one evening when we were talking over the phone. “They’ve only been around about a year and are losing money. If Pixar’s films are hits, we’ll make more than them. We should be worth more.”

  Netscape had been valued at a little over $1 billion when its stock began to trade on August 9. By the end of that day, it was worth over $2 billion. We were not privy to how that valuation had been calculated, but we did know there had been an investor and media frenzy over investing in Netscape’s stock due to the enormous interest in the Internet.

  “We’ll have the same level of interest,” Steve went on, “if not more. We can value Pixar at two billion dollars.”

  But in my mind, no amount of number crunching could get Pixar to a value of $2 billion. I would have been surprised if our investment bankers were thinking about a quarter of that number.

  “It’s a huge risk,” I tried to push back. “If we model our IPO on Netscape, the biggest IPO frenzy in years, we might blow the whole thing. We’re better off getting out of the gate, keeping investors happy, and letting the stock build momentum.”

  “As more investors learn about Pixar they’ll want in,” Steve went on. “Parents will want to buy shares of Pixar stock just so their children can have some. It’ll be like owning a few shares of Disney, something to treasure.”

  It was certainly possible that parents might want Pixar stock for their children. Steve and I had recently signed the version of Pixar’s stock certificate that would be issued to stockholders. Emblazoned on the bottom were five characters from Pixar’s short films and Toy Story. It might even be a collector’s item one day, but I could not imagine that the volume of shares purchased for this reason would have any impact on Pixar’s stock price.

  “I don’t think that will be enough to make a difference in the stock price,” I said. “The price will be driven by big investment firms buying and selling larger blocks of stock, not families buying stock for their children. Ultimately, it’s not even up to us. It’s up to Robertson Stephens and our other banks.”

  “But they may not get it either,” Steve retorted. “We have to make sure they understand Pixar’s value.”

  I was quite sure that Robertson Stephens did get it, and I worried that Steve was overreaching. Even if he was correct about the value, it was much better to reach it by allowing market momentum to lift Pixar there rather than demand it at the outset. The last thing we needed was the press to report that we asked for too much and disappointed investors. It might mean we would raise slightly less money for Pixar, but it would be better for everyone in the long term if there were confidence in Pixar’s stock.

  Eventually our investment bankers came up with their own verdict. They thought Pixar’s stock might quickly level out in the high teens, giving Pixar a value of around $700 million. They wanted the proposed price to be $12 to $14 per share. That would provide some cushion so that the price would have room to go up after the initial sale. That meant the proposed price would value Pixar at around $500 million, an enormously respectable number.

  But Steve needed to be on board.

  “If we start at twelve to fourteen dollars when we file with the SEC,” I told him, “and if the road show goes well, we could double it, just like Netscape did. If we double it, Pixar will be valued at a billion dollars. We’ll have a shot, but we take much less risk starting conservatively and letting the market be the judge. All the bankers are on board. Me too.”

  At least I could project a path where Pixar was worth a billion dollars. This would translate into a huge payday for Steve, who would own the vast majority of it, and create opportunities for Pixar to raise more money later on if we needed it.

  “I still think we’re worth more than Netscape,” Steve replied, “and I don’t want to leave money on the table. If Pixar is worth more, investors should pay us for it so Pixar has the money.”

  “The downside is too great,” I pushed back. “If we price it too high and end up disappointing investors, our stock will languish and no one will benefit. A half-billion-dollar value is more than respectable, and we have a chance of doubling or tripling it. I think we should trust our bankers on this one.”

&n
bsp; “Let me think about it,” Steve said.

  A couple of hours later he called me.

  “We’ll go with it,” he said. “I think we’ll have so much interest after our road show that we’ll double the opening price.”

  I breathed a huge sigh of relief. We had our starting place.

  On October 12, 1995, we filed Pixar’s prospectus with the SEC, showing a price range of $12 to $14 per share of stock. We had worked immensely hard, not just on the technical details but on the quality of the language. The SEC told us informally it was one of the most finely crafted prospectuses they had seen, a compliment that had the old lawyer in me beaming with pride. After a few weeks of back-and-forth, the SEC approved our filings, and Steve, Ed, and I were ready to hit the road to introduce Pixar to investors.

  We would need a slide show to tell Pixar’s story, one that wove together Pixar’s history, aspirations, business plan, and risks, together with a video showcase of our work. Together Steve and I mapped out what the slides needed to say, and then Steve went to work on them himself, requesting images, data, and numbers, and when he needed them. Then he’d ask me to take a look, and we’d make revisions.

  Steve paid attention to every nuance of the slides, even details that, as far as I could tell, were invisible to the naked eye, like font kerning—which is adjusting the space between letters—and font smoothing to make sure the curves on each font were perfect. He hired a presentation professional, Wayne Goodrich, to help finalize these details and to make sure that at every single stop on the road show, all the pieces were in place to show the presentation and video perfectly.

  So there it was. As we headed into November, Pixar was racing toward a sequence of events that on the strength of just two numbers—Toy Story’s opening weekend box office and the opening price for Pixar’s IPO—would say yay or nay to sixteen years of effort, almost $50 million of investment, and the tireless work of some of the world’s most talented storytellers and programmers. The month would look like this: