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CASE ANALYSIS

CASE ANALYSIS 2

The Disney company was having a huge investment in the form of the capital and the capacity to take over any of the company. But the nature of the business in which they are involved is having the importance of the creativity and the technology, that gap was filled by Pixar in the past. Both of the companies were having the joint venture through which they were having the maximum utilization of the capabilities they are having. The strategic position of Disney was higher as compared to the Pixar in terms of the capital, as they were backed by the many successful projects like The Lion King, and Snow White. They are also backed by the various income steams such as the amusement parks and distribution setup of the movies. The strategic position of the Pixar was higher as this was having the creativity and CG technology which helps in the successful completion of the animated movie with the least of the human and time resources (Appendix 1).

The willingness to pay for the acquisition of the other companies was best depicted in the case of Disney. As they were having the huge capital supported by the years of the experience and various streams of the income. Moreover, Disney was having experience in the distribution and marketing of the movies. Although, Pixar was the complete success story having the experience of supporting one of the most popular animated movies of the history, who also won the awards like, the Academic awards and Oscar awards (

Appendix 2

). But, still, the option for the acquisition for the other company was only feasible for Disney. But, according to the scenario given in the case, none of the company was willing to acquire the other organization. Although Disney was having the capability to get Pixar in exchange for the billions of dollars for their technological advancement, capital, and other owners of the company. but reluctant due to the higher prices of either of the companies.

If Disney put into the Better-off test, then there are two solutions for the company to manage the emerging crises in their production and increasing costs of the projects. The first option Disney was to acquire the company, Pixar in exchange for the higher costs, while they are already facing the rise in the costing of the company. the cost of the acquisition for the company would be higher, then the other solution to beat the current crisis in the company would attain the contracts as they were having in the past related to the production of the movie. This will allow the company to stay at its current cost structure with more exposure to the best technological methods to create animated characters. This situation will also be suitable for Pixar as well, as this will be providing them the opportunity to work with the best-animated company in the world, who is having a huge competitive edge over their capital capacity.

Yes, the common ownership of both companies over the products is valuable. As Disney and Pixar was having an equal share in the profits of the projects, leaving the portion for the marketing and distribute on for the Disney was responsible for this purpose. There was some modification were needed into this as this will keep on creating the mess in between both companies that distribution and the sequel of the movie were held by Disney. This will be undermining the brand identity of Pixar. This can be best negotiated with the help of the further division of the marketing and distribution among both companies (Alcacer, Collis, & Furey, 2005).

References
Alcacer, J., Collis, D., & Furey, M. (2005, Mar 2). The Walt Disney Company and Pixar, Inc.: To Acquire or Not to Acquire? Retrieved from hbr.org: https://store.hbr.org/product/the-walt-disney-company-and-pixar-inc-to-acquire-or-not-to-acquire/709462

Appendix 1:

Appendix 2

9 – 7 0 9 – 4 6 2

R E V : J A N U A R Y 1 5 , 2 0 1 0

________________________________________________________________________________________________________________

Professors Juan Alcácer and David Collis and Research Associate Mary Furey prepared this case. This case was developed from published
sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary
data, or illustrations of effective or ineffective management

Copyright © 2009, 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

J U A N A L C Á C E R

D A V I D C O L L I S

M A R Y F U R E Y

The Walt Disney Company and Pixar Inc.:
To Acquire or Not to Acquire?

In November 2005, Robert Iger, the newly appointed CEO of the Walt Disney Company, eagerly
awaited the box office results of Chicken Little, the company’s second computer-generated (CG

)

feature film. He knew that, for Disney as a whole to be successful, he had to get the animation
business right, particularly the new CG technology that was rapidly supplanting hand-drawn
animation.1 Yet the company had been reliant on a contract with animation studio Pixar, which had
produced hits such as Toy Story and Finding Nemo, for most of its recent animated film revenue. And
the co-production agreement, brokered during the tenure of his predecessor, Michael Eisner, was se

to expire in 2006 after the release of Cars, the fifth movie in the five-picture deal. Unfortunately,
contract renewal negotiations between Steve Jobs, CEO of Pixar, and Eisner had broken down in 200

amid reports of personal conflict. When he assumed his new role, Iger reopened the lines of
communication between the companies. In fact, he had just struck a deal with Jobs to sell Disney-
owned, ABC-produced television shows—such as “Desperate Housewives”—through Apple’s
iTunes Music Store.2 Iger knew that a deal with Pixar was possible; it was just a question of what that
deal would look like. Did it make the most sense for Disney to simply buy Pixar?

Walt Disney Feature Animation

Walt Disney Feature Animation began with the production of Snow White and the Seven Dwarfs in
1934. Toys and memorabilia based on the movie’s characters were stocked in stores such as
Woolworth’s around the film’s release, a move that became a trademark of Disney’s strategy. Afte

many early successes, the animation division struggled for decades after Walt Disney’s death but was
rejuvenated with the arrival of Michael Eisner, as well as Jeffrey Katzenberg as chairman of Walt
Disney Studios, in 1984. Under them, the studio produced a string of hit films that included The Little
Mermaid and Beauty and the Beast, up to the enormous success of 1994’s The Lion King, which alone
generated over $1 billion in net income for the company.

Disney’s Feature Animation unit was described as an open, collaborative environment. So open,
in fact, that leadership relied on all employees to generate story ideas. Three times a year, Michael
Eisner, Roy Disney, and two other Disney executives would host a “Gong Show” during which all
employees had the opportunity to present their story ideas. The executives would cull the best ones
and ultimately choose the winner. “It’s a very collective approach to our work. We spend a lot of time

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709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?

in meetings arguing, discussing, and trying to come to a consensus,”3 as one commented. Most of
Disney’s animated story lines came out of these meetings. The winner was remunerated for his or her
contribution and, while figures were not made publicly available, some said winners earned up to
$20,000.4 Disney animators were compensated, in part, based on the success of the film, which made
it difficult for other studios to lure talent away.

Eisner believed in making clear who was good at their job, and who was not so good, and wanted
to give control to leaders who had a sense of judgment about creativity and business. Seventy-five
percent of the time, he was able to find a director who had these skills and wanted to work on a
particular movie; the rest of the time directors would be told to “just do it.”

Katzenberg, who was known for his grueling work ethic and passion for animation, made it his
personal mission to bring the studio back to its former glory. He supervised every aspect of the
studio’s films. According to one former Disney executive, “Jeffrey is the sheep dog and the wolf. He’s
the sheep dog guarding us, and the wolf hunting us.”7 Katzenberg was credited with hammering out
the storytelling of each film and ensuring that each film had a moral resonance. He also brought on
external talent to each movie, such as Elton John, who contributed songs for The Lion King.

Recent Box Office Performance

After The Lion King in 1994, every Disney-produced animated film fell below expectations (see
Exhibit 1). When asked in 1997 about the division’s disappointing performance, Eisner replied,
“I don’t think people quite understand our company. We have many avenues to make money from
one of our animated films. The video revenues from one of our films are large, the consumer
products huge.”

Some of the same features that observers credited for Disney Animations’ success—large staff,
large budgets, and lots of time—were also blamed for its demise. Disney Animation had just 275
employees in 1988; about 950 in 1994 for the release of The Lion King; and 2,200 at its peak in 1999.

Competition for animators in the 1990s also caused salaries, which accounted for 80% of each film’s
cost, to balloon, with top animators’ pay rising from $125,000 in 1994 to $550,000 in 1999.10 And these
pay increases affected employees across the board.

In 1994, Eisner refused to promote Katzenberg to president of the company, prompting his swift
departure. The absence of Katzenberg, who was generally considered to be the studio’s creative force,
struck many as the cause of the decline. As one commentator noted, “the company’s once-invincible
animation studio has fallen on hard times since studio chief Jeffrey Katzenberg left.”11 In 1997,
Katzenberg, along with Steven Spielberg and David Geffen, started rival animation studio
DreamWorks. According to reports, in the years that followed, DreamWorks attempted to lure away
some of Disney’s best animators.12

Joe Roth, former chairman of 20th Century Fox, became chairman of Walt Disney Studios after
Katzenberg’s departure. In charge for six years, he focused the studio’s energy on live action films.1

Peter Schneider, former head of Disney Animation, took over in 2000 after Roth left. Schneider’s goal
was to deliver “emotional, thematic stories.”14 He worked solely with established Disney directors
and producers and relied on his younger development staff to broker deals with up-and-coming
filmmakers, in contrast to the hands-on deal-making style of his predecessors, Katzenberg and
Roth.15 The product development group assigned directors for each animated movie.

In the late 1990s, Disney set up a “Secret Lab” in an old Lockheed plant near Burbank Airport as a
response to the growing popularity of three-dimensional (3D) CG films. The group’s first CG project

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This document is authorized for use only by Xuxin Chen in TBUS 400 & ELC BUS 470 SP 2020 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2020 to Aug 2020.

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462

was the costly Dinosaur, which was released in 2000 to a strong opening weekend, but which
ultimately disappointed at the box office. The Lab was shuttered in 2001 after Roy Disney viewed and
rejected the second project underway, Wildlife, which he thought was packed with adult themes and
strayed too far from Disney’s family-friendly brand offering. Disney then focused its animation
efforts on traditional two-dimensional (2D) projects such as 2001’s Atlantis: The Lost Empire.16

In 2002, under new feature-animation chief Thomas Schumacher, Disney embarked on an
aggressive cost-cutting mission. Lilo & Stitch, the first movie made in the new environment, cost
about $80 million to make, versus $150 million for the 1999 Tarzan. Instead of 573 animators crafting
170,000 individual drawings, a crew of 208 rendered 130,000 drawings.17 Cost-cutting efforts took
Disney’s animation department from its high to around 1,100 in 2003. At that point, as rival studios,
such as News Corp.’s 20th Century Fox, exited the market, salaries slid precipitously. The market rate
for the animator who brought home $550,000 in 1994 was half as much by the early 2000s.18 Apart
from omitting redundancies, Disney Animation kept costs down by cutting corners where it could, in
ways that were imperceptible to audiences. For example, the group eliminated things such as the
number of characters seen in each frame or the amount of motion in the background.19 The television-
animation unit also produced very low-cost films, like The Tigger Movie, which could make money
with only $45 million in box office receipts, since the production cost was kept down to $15 million.

In 2003, Disney Studios finally set up its own CG animation department. However, many staff
members needed to be retrained in the new technology, which cost Disney money, heightened
tension, and depressed morale within the studio. Disney decided to slow production on its animated
films to give the staff more time to work on them and hammer out the story lines. American Dog and
Rapunzel Unbraided, the second and third releases after Chicken Little, were both pushed back.

Throughout this period, Disney came to rely on revenue and characters produced by its partner,
Pixar. Between 1998 and 2004, Pixar CG movies contributed a total of more than $3.5 billion to Disney
Studio revenues, and more than $1.2 billion to Disney’s operating income (Exhibits 2 and 2a). Pixar’s
contribution represented 10% of revenue and over 60% of total operating income over the period.
In 2005, Disney even set up a group known as Circle 7 to produce sequels to Pixar movies. The
40-person staff working on Toy Story 3 in March 2005 grew to 160 people during the following year.22

Movie Economics

While box office revenues from the theatrical release were the typical measure of a movie’s
success, financial success actually came from other revenue streams generated by the movie. By 2005,
such sources included home video sales (originally on cassette tapes, but increasingly on DVD); pay-
per-view and video-on-demand on cable channels; television showings, whether on free channels,
such as NBC and CBS, or on cable channels; merchandise sales including toys, apparel, books, etc.;
and video games and other electronic uses of the characters (see Exhibit 3). By 2005, the largest of
these revenue sources was not theatrical box office but home video. Because character-related sales
had such a long tail, revenue for a hit animated movie would come in over many years—up to
decades for classic movies that were re-released theatrically and in home video form. Given the
longevity of a great movie, film libraries were valuable assets. DreamWorks’ film library, for
example, was about to be sold to Paramount for $900 million.

Sequels to successful movies were another important source of revenue. The sequels to Toy Story,
Shrek, and Ice Age, for example, generated between 30% and 90% more box office revenue than the
originals. Once a character had been established, the existence of a built-in audience for subsequent

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?
4

movies reduced marketing costs. Successful sequels would also extend the life of the original movie,
particularly for animated features that appealed to successive generations of young children.

Pixar Inc.

Pixar was unusual among movie studios in generating a succession of box office hits. Its first five
full-length films each grossed over $350 million.24 Steve Jobs said, “Everybody has tried to break into
the animation market since Snow White was released in 1937. So far, only two companies have ever
produced a blockbuster production grossing more than $100 million, Disney and Pixar.”

Pixar’s animation broke from the traditional model because the company did not use hand
drawings but rather 3D computer-generated models. In 2D traditional animation, frames comprised
hand-drawn cels, which required the skills of hundreds of people working for two to three years.
Traditional animation constricted artists’ flexibility, too—if a change needed to be made to a character
or scene, all subsequent frames had to be changed. Three-dimensional CG, on the other hand, used
mathematical models to redraw each cel and mimic camera angles in ways that traditional animation
could not.

Pixar used its own proprietary computer animation technology to generate incredibly lifelike
3D images and backgrounds, although CG still could not quite make human characters look perfectly
realistic. Said Jobs, “We have 10 years of proprietary software systems that you cannot buy anything
close to in the marketplace. You have to build them yourself.”26 Pixar’s technology allowed animators
to manipulate hundreds of motion control points within a single character, to reuse animated images,
and to edit easily.27 These technologies enabled Pixar to make animated films faster than its
competitors and at a fraction of their cost. For example, the company made Toy Story with just 1

staff members, who spent the time saved on animation to focus on story and character development,
as well as fine-tuning visual details.

History Pixar traced its origins to the University of Utah in the 1970s, where a young Edwin
Catmull studied computer science in a program renowned for creating the new field of computer
graphics. Around the same time, Alexander Schure, president of New York Institute of Technology
(NYIT), hired a team of animators to make a film version of “Tubby the Tuba,” a children’s record.
Frustrated by the limitations of hand-drawn animation, Schure flew to the University of Utah, where
he met and recruited Catmull to work at the Institute. Catmull and his hand-picked team spent four
years at NYIT, where they made inroads into the field despite never producing the Tubby the Tuba
movie.29

In 1979, George Lucas approached Catmull’s team with an offer to work on special effects for
Lucasfilm, producer of the wildly successful Star Wars and Indiana Jones franchises. While working
there in the early 1980s, Catmull met John Lasseter at a computer graphics conference and the two
became friends. Lasseter, a young animator from Disney, had studied at California Institute of the
Arts with the likes of Tim Burton. Skilled in art as a young boy, Lasseter read a book on the art of
animation and Disney during his freshman year of high school and realized what he wanted to do
with his life. After graduation, he joined the ranks at Disney and worked on Mickey’s Christmas Carol.
He commented, “I felt that Disney was, at the time, doing the same old thing. They had reached a
certain plateau technically and artistically with, I think, 101 Dalmatians, and then everything had been
kind of the same ever since then, with a glimmer of characters or sequences that were special.”30
In 1984, Lasseter went to Lucasfilm’s computer division under Catmull.

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462
5

In 1986, Steve Jobs—who had left Apple Computer the year before—bought the Lucasfilm
computer business, then called Pixar, for $10 million.31 Initially, Jobs intended Pixar to be a computer
hardware and software company. He spent the next several years subsidizing the company to the
tune of nearly $50 million from his personal funds. When the graphics computers did not sell, Jobs
cut a third of Pixar’s staff in 1991 and left only the animation division.32 Jobs said, “If I knew in 1986
how much it was going to cost to keep Pixar going, I doubt if I would have bought the company. The
problem was, for many years the cost of the computers required to make animation we could sell was
tremendously high. Only in the past few years has the price come down to the point that it makes
business sense” (see Exhibits 4 and 4a).33

Software Pixar initially developed three proprietary technologies: RenderMan, Marionette,
and Ringmaster. In 1989, the company released RenderMan, a software system that applied texture
and color to 3-D objects and was used for visual effects. Pixar used RenderMan itself and sold it to
Disney, Lucasfilm, Sony, and DreamWorks, which used it to create effects like the dinosaurs in
Jurassic Park. The program served as Pixar’s main source of revenue during the company’s early
years. As of 2005, it had developed special effects for 100 films, and 44 of the last 47 movies that won
the Oscar in visual effects had used RenderMan. In 2001, Catmull, along with two other Pixar
scientists, won an Oscar for RenderMan and its advancements to the field of motion picture
rendering.

Marionette, the primary software tool for Pixar animators, was designed specifically for character
animation and articulation, compared with other animation software that was designed to address
product design and special effects. Ringmaster was a production management system used to track
internal projects and served as the overarching system to coordinate and sequence the animation,
tracking the vast amount of data employed in a three-dimensional animated film.

Short films and commercials To develop its computer-generated technology and
storytelling creativity, Pixar had incorporated short films into its corporate strategy since its
inception. In 1986, Pixar produced Luxo, Jr., the first computer-animated film to be nominated for an
Oscar. In 1989, Tin Toy won the Oscar for best short film. In 1997, Geri’s Game not only won Pixar an
Oscar, but also enabled the company to advance its technology in skin and cloth, while 2000’s For the
Birds advanced the technology in fur and feathers. By 2005, the Pixar team had won 20 Academy
Awards.34

Pixar also sought revenue through the production of animated or partially animated television
commercials for companies and products such as Coca-Cola, Listerine, and Lifesavers, but gave up
this line of revenue in 1996 to pursue movies.

Animated feature films Jobs, Catmull, and Lasseter all had one ambition in common:
to make an animated feature film. Said Jobs, “Ed shared with me his dream to make the first
computer-animated feature film. And I bought into that dreamboat sort of spiritually and financially.
And we bought the computer division from Lucasfilm, we incorporated it as Pixar, an independent
company, and we were off to the races.”35 In 1991, Lasseter believed Pixar was finally ready to break
into film. He pitched an hour-long made-for-TV movie to Katzenberg, who, impressed by Lasseter,
came back with an offer to do a full-length movie backed by Disney.

Disney and Pixar’s Relationship

CAPS Disney and Pixar’s relationship began in 1986, when the two studios collaborated on the
development of Computer Animated Production Systems (CAPS), a production system owned by

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?
6

Disney and used to make some of its two-dimensional cel-based animated movies. Disney’s first use
of CAPS was for The Rescuers Down Under, and the company continued to use CAPS for many of its
animated feature films, including The Lion King. This relationship with Pixar surpassed Disney’s
expectations.36

Feature film agreement Following Lasseter’s proposal, Disney and Pixar signed a deal in
1991 to produce the first of three full-length 3D CG animated movies (see Exhibits 5 and 6). Disney
agreed to fully fund the production cost of the movie in return for owning the movie rights. While
neither company disclosed the movie’s budget, industry experts estimated that it was between $10
and $20 million.37 Pixar was to be paid a participation fee based on total revenue for the movie and
would fund the overage if production costs exceeded a certain pre-agreed budget (although Pixar
could recover these costs if the film met certain profit targets). Disney retained control over
scheduling the film’s release dates. In its 1995 S-1 filing, Pixar stated: “Disney has been by far the
most successful producer of animation feature films and other family oriented movies distributed by
Disney are likely to be in the market concurrently with and competing with Pixar’s animated feature
films.”38 This three-picture deal resulted in the 1995 hit film Toy Story, directed by Lasseter, which
garnered more than $350 million in box office and video sales, making it the highest-grossing film
released in the United States that year.39 Yet from 1995 to 1998, Pixar earned only $56 million in
revenue. When asked if he had regrets about inking the deal, Jobs said, “None, no. We’re working
with the best in the business and we’re learning a lot. We call it going to Disney University.”40

Co-production agreement Following the success of Toy Story, Disney bought 5% of Pixar in
1997 just after its IPO,41 paying $15 million for 1 million shares with warrants to buy an additional 1.5
million shares of common stock at higher prices.42, 43 The purchase was part of a 10-year deal, signed

on February 24, 1997, whereby Pixar would exclusively produce for Disney at least five original full-
length animated films. Production costs, which averaged $120 million per film, would be shared
equally between the two companies (see Exhibit 6 and 7). Disney would fund all of the marketing
expenditures, which had to be covered before Pixar would receive half the remaining revenues from
the box office and 50% of the other revenue streams after paying Disney’s distribution fee. Pixar
would receive no share of any revenues generated in the Disney theme parks, cruise ships, or other
location-based entertainment. The net result was that Pixar would earn perhaps up to 40% of the total
profits that the movie generated. Disney, in contrast, received a distribution fee of 12.5% of the box
office earnings, in addition to its half share of the box office and the remaining revenue share of the
other sources of income. In total, the company would receive at least 60% of each movie’s profits (see
Exhibit 8).44

Disney retained the exclusive distribution and exploitation rights to all feature films produced
under the deal. This included the right to produce sequels, which Pixar could choose not to co-
finance.45 In contrast, if Pixar wished to exploit or distribute any of its films or characters, it would
have to pay a license fee to Disney. Disney retained final control over all marketing and distribution
decisions, although each partner’s input would be considered and everything would be co-branded.
One example was the release date of each year’s Pixar movie. In principle, Disney could choose to
give preference to one of its own movies for key release dates, like July 4. However, Disney could not
release one of its own G-rated movies within a window of a certain number of weeks of the
Disney/Pixar movie release. Pixar had final control over the production of each film.

The last two pictures under the original 1991 deal would be the first two pictures of this new deal,
as would any sequels to Toy Story. The deal would take Disney and Pixar through the release of
Cars in the summer of 2006. Citigroup estimated that the five-film deal added over $1.5 billion in

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462

operating income and $0.44 in EPS to Disney’s bottom line throughout the decade-long partnership,
including non-box office revenue sources.46

The co-production agreement also covered ancillary revenue streams, as follows:

 Home video—Home video sales constituted a large portion of the lifetime revenue from
Pixar’s films. The company believed that the popularity of the DVD format drove sales.
Monsters, Inc., for example, was the best-selling home video in 2002, and Finding Nemo was the
highest-selling video of all time in the United States.

 Television—ABC Networks showed Pixar movies on its television channel at a fee of between
4% and 7% of the movie’s domestic box office gross, with a cap of about $15 million. This was
substantially less than Disney paid for Harry Potter movies and less than Fox paid for Spider-Man.

 Licensing agreements—In 2002, Starz licensed the pay-TV rights to Monsters, Inc., Finding
Nemo, The Incredibles, and the forthcoming Cars.47

 Merchandise and games—Pixar and Disney awarded video game publisher THQ Interactive
the rights to create games of Finding Nemo, The Incredibles, and Cars. In 2004, Pixar struck an
exclusive deal with THQ that gave it the rights to four films beginning with Ratatouille, which
came out in 2007.

Renegotiation for distribution-only deal Since 2002, Steve Jobs had been trying to broker a
deal with Disney whereby Pixar would shoulder all of the films’ production costs in return for 100%
ownership of the films, leaving Disney with just a lower, fixed distribution fee.48 Pixar’s 2002 Annual
Report stated, “We have produced four tremendously successful films to date, and we believe that
this success, combined with the strength of our financial resources, position us to negotiate an
arrangement with more favorable economic terms.”49 In September 2003, Pixar lobbied for a stake in
the upcoming The Incredibles and Cars. Disney countered by offering a stake in return for a higher
distribution fee. Final negotiations in 2004 covered how long Disney would hold the rights to future
Pixar movies, whether Pixar would have the rights to any sequels, and who would get television
rights.50 Throughout the negotiations, Pixar often called for a deal akin to the one that George Lucas
struck with 20th Century Fox for the Star Wars series (see Exhibit 9).

Pixar thought that, if it negotiated a new distribution deal with another studio, it would seek
complete control in return for funding all costs and paying only an 8% distribution fee. In principle,
this would give Pixar access to 90% of a film’s lifetime revenue across all methods of distribution
(in return, however, for bearing all of the cost and risk).51

The treatment of sequels was a sticking point in negotiations with Disney. Under the terms of the
1997 agreement, Disney could produce sequels to Pixar movies, without Pixar’s involvement, for
theatrical release or as direct-to-video releases. In its 2002 10K filing, Pixar stated, “Disney’s decision
governs,”52 regarding disagreements over sequel production. Pixar feared that the cheaper sequels
and direct-to-video quickies produced without its involvement, like Cinderella II, could potentially
tarnish its brand. Indeed, Disney was intending to make Toy Story 3 by itself, since Pixar had declined
to be involved. Another point of contention was whether or not Toy Story 3 would be counted against
the five-picture deal; Disney didn’t want it to, but Pixar did.53 Reports surfaced in 2004 that Jobs
wanted Disney to return the rights of two yet-to-be-released films, The Incredibles and Cars, thereby
blocking Disney’s attempts to produce sequels for the two films. Pixar’s final offer to Disney was that
the latter could distribute each of Pixar’s films for five years, after which the rights would be returned
to Pixar. Pixar also wanted Disney to give up its co-ownership of past films.54

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?
8

Relations between Jobs and Eisner had been rocky.55 One analyst said “they hate each other” and
attributed Pixar’s decision to walk away from negotiations over an earlier deal to personal conflicts
between Jobs and Eisner.56 Jobs had previously criticized Eisner publicly, saying that Pixar executives
“feel sick” about the prospect of Disney marketing Pixar films.57 Eisner, in turn, predicted that
Finding Nemo, the next Pixar release, would be a flop and was infuriated by Apple’s “Rip, Mix, Burn”
advertising campaign, which he saw as an incitement to piracy.58 Tom Staggs, Disney CFO, said that
Disney could not accept Pixar’s final offer because doing so would have cost Disney “hundreds of
millions of dollars it is already entitled to under the existing agreement.”59 Others close to the deal
attributed the rocky relations to the length and tone of the negotiations, during which Disney often
left Pixar hanging for weeks on end.60

Pixar identified Sony, Warner Brothers, and 20th Century Fox as potential suitors. In 2003, Jobs
noted, “We’ve talked to many of these studios, and we know we can get the deal we want.”61
On January 29, 2004, Pixar announced that it was ending its talks with Disney to renew the existing
agreement and was looking for another partner.62 The breakdown of the Disney/Pixar partnership
lent strength to calls by some Disney board members to remove Eisner and was one of the factors that
led to his eventual departure. In response to the news, former board members Roy Disney and
Stanley Gold issued a statement: “More than a year ago, we warned the Disney board that we
believed Michael Eisner was mismanaging the Pixar partnership and expressed our concern that the
relationship was in jeopardy.”63 Warner Brothers immediately announced an interest in negotiating
with Pixar.64 Disney studio head Dick Cook responded by saying, “No one has a lock on talent, no
one has a lock on creativity or technology or storytelling.”65

Pixar’s Corporate Culture

Jobs believed that Pixar’s competition would feel pressure to replicate his company’s style because
they lacked the creativity, the technology, and the “blending.” He noted: “We have spent 10 years
merging two cultures together. It sounds really easy, like you put a technical person here, and a
creative person there, and they go out to lunch, and somehow, it all works. It’s not. It’s really tough.
And it took us 10 years to figure out how to do this.”66 At Pixar, the technical computer staff and the
creative development group, including the animators, an art department, and a story department,
worked together, driven by the mantra that the story came first, and that creativity existed at all
levels of the organization.

Pixar believed in the primacy of people. Catmull noted, “If you give a good idea to a mediocre
team, they will screw it up; if you give a mediocre idea to a great team, they will either fix it or throw
it away and come up with something that works.”67 Pixar hired talented people and then created a
supportive, trusting working environment in which collaboration could thrive. Employees were
picked based not only on creative talent, but on whether they would be a good fit with the
organization. According to one employee: “The most important thing I was asked over and over
again was, ‘Can I work with you?’ Then it was, ‘Are you qualified for the job?’ You can have a lot of
creative purity and still be the most dysfunctional group on the planet.”68 Pixar readily accepted
prominent outsiders from companies like Industrial Light & Magic (ILM) and Lucasfilm’s special
effects division.

According to John Lasseter: “At Pixar, an animator is more an actor than an artist. Sure, they can
draw, but the real trick is to make these 3-D characters come to life. That requires acting ability more
than anything else.”69 The methodical nature with which Lasseter approached his films was well
documented. Analyzing a two-second shot, Lasseter directed: “Let’s return Mr. Potato Head’s facial

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462
9

features to the default position, so it’s easier for the baby to bite off his nose,” or “And let’s see if we
can make the baby’s slobber more elastic, so it sticks and stretches longer.”70

Pixar operated according to three basic principles. The first was that “everyone must have the
freedom to communicate with anyone.”71 Pixar corporate headquarters in Emeryville, California, was
designed with exactly that principle in mind. After learning from Disney mentors that the company
did its best work when staff members were all housed together in close quarters in the old Hyperion
Studio, Jobs and Lasseter realized the importance of creating a single campus-like environment, with
an atrium center that maximized chance encounters and employee interaction.

Second, “it must be safe for everyone to offer ideas.” Each film was “filmmaker led” by the
producer and director who had championed the idea and were committed to its success, and who
received little oversight. If a problem arose, the team called on the “creative brain trust”—a group
that comprised Lasseter and eight directors—to engage in a back-and-forth on how to make a movie
better. It remained the team’s job, however, to decide what to do with the advice.72 According to
reports, this group almost entirely reworked two of Pixar’s movies when production team members
themselves felt that their projects were not up the company’s highest standards. Lasseter also
imported and expanded on a review process—the “dailies”—from Disney and ILM. Rather than
including only senior management, Pixar’s daily review audience was the entire animation crew,
who were encouraged to provide constructive feedback. The epitome of this approach was a
philosophy of “Plussing,” which Lasseter defined as “making something pretty good pretty great,
making a fine-tune here and there until an idea sings.”73 The result was a deeply engrained culture
that believed that everything Pixar produced had to be done to one excellent quality standard.74

Third, the company vowed to “stay close to innovations happening in the academic
community.”75 In fact, most of Pixar’s technical employees held PhDs. Lasseter firmly believed in the
interplay between art and technology, and the infusion of better technology at each stage of
production—an environment in which, as he said, “art challenged technology, and then technology
inspired art.”76 The company also established Pixar University to offer classes in drawing, acting, and
motion, as well as to encourage technical directors and artists to study alongside the animators.77

Lasseter signed a 10-year employment contract with Pixar in 2001 as head of the animation
studios. He received a signing bonus of $5 million, an annual salary of $2.5 million, and options on
1 million Pixar shares. Eisner had once remarked that Lasseter was the only difference between
Disney and Pixar.78 The rest of Pixar’s 750 employees were employed at will. And loyalty was high.
Unlike other studios, where animators were hired and fired based on movie demand, Pixar retained
its employees throughout the years. The company historically released one movie per year, a pace
that kept the directors on staff busy, because each project took at least four years to complete. If there
wasn’t work to be done on a film, Pixar assigned employees to projects in research and development.

Pixar went public one week after the release of Toy Story in 1995, raising $140 million in the largest
IPO of the year (Exhibit 10). Steve Jobs retained about 50% of the ownership of Pixar, and although
he was occupied at Apple, he spent half his time at Pixar in the early years.

Competition

Pixar competed with other major film studios that produced movies targeting the family segment,
such as Fox, Sony, Lucasfilm, DreamWorks, MGM, Universal, Paramount, and, to a certain extent,
Disney. Because animated films generated the highest returns of all movie genres, and barriers to
entry decreased as access to technology grew, competition in the CG space became fierce. Recent

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?
10

animated successes included Ice Age and Robots (Fox’s Blue Sky subsidiary) and Polar Express (Warner
Brothers). Even Disney, in conjunction with Vanguard, released Valiant and, through its own CG
unit, Chicken Little. Also, a handful of fledging animation studios proliferated in California’s Bay
Area. Companies such as Orphanage, Wild Brain Inc., and CritterPix Inc. all announced plans to
create CG feature films starring lovable, relatable characters. While each studio was at a different
stage in its evolution—the Orphanage supplied special effects for movie studios while Wild Brain
won an award for best computer-generated short film at the 2001 World Animation Celebration—all
had the same ambition: to be the next Pixar.79

Pixar’s most formidable rival was DreamWorks, Katzenberg’s studio and owner of the Shrek
franchise. Katzenberg was determined to create a studio that matched Disney’s success in animation.
But he invoked the inverse of the Disney formula—rather than making movies for children and the
child that exists in everyone, the DreamWorks’ motto was to make movies for adults and the adult in
each child.80 The studio’s success did not happen immediately, but rather arose through much trial
and error. The success of Shrek came as a bit of a surprise even to Katzenberg, who said: “It was one
of the riskiest movies I’d ever done. It defied conventional wisdom in every way, the antithesis of
everything an animated movie had been.”81 The failure of DreamWorks’ Spirit: Stallion of the Cimarron
in 2002 and Sinbad: Legend of the Seven Seas in 2003 signaled to Katzenberg “the last gasp of old-style
animation.”82 Shortly thereafter, Katzenberg replaced 200 graphic artists with 200 computer artists.
When efforts to lure Pixar away from Disney failed, DreamWorks executives renewed ties with U.K.-
based animation studio Aardman Animations, who had worked with them on Chicken Run, for the
upcoming Wallace & Gromit.

Between 1998 and 2005, DreamWorks’ successful CG releases included Antz, Shrek, Shark Tale,
Shrek 2, and Madagascar. The studio’s average worldwide box office for that period was $317 million,
compared with Pixar’s $538 million.83 However, DreamWorks, with its staff of 1,280, produced two
CG films a year as opposed to Pixar’s one, leading to $1 billion in revenue in 2004. Production costs
were high—DreamWorks’ average movie cost between $100 million and $130 million. Direct-to-video
films, which cost roughly $30 million to make, were an integral part of DreamWorks’ yearly release
schedule, along with one original and one sequel. The studio boasted 14 directors on long-term
contracts and included staff from 38 countries.84 DreamWorks had a distribution deal with
Paramount through 2012 by which it paid Paramount an 8% fee, which was lower than the industry
average. That 8% fee applied to all revenue streams excluding merchandising, and expenses before
revenue recognition.85 In October 2004, the DreamWorks IPO separated DreamWorks Animation
from DreamWorks SKG, Inc., a U.S. film studio. As part of the deal, DreamWorks SKG became
responsible for the marketing and distribution of the animation studio’s products; it also received an
8% fee.

Acquisition?

Robert Iger knew that he wanted to maintain his company’s relationship with Pixar. The question
was on what terms. Many media analysts argued for an acquisition, reasoning that animation was
integral to Disney’s corporate strategy because characters from animated films drove retail in its
theme parks and consumer product divisions.86 And Pixar’s track record for producing smash hits
was unmatched. “This is the kind of synergy that makes a good deal of sense,” as one commentator
wrote.87 Merrill Lynch analyst Jessica Reif Cohen termed it a “near-perfect strategic fit.”88 Some said
the move would transform Disney into the studio of the 1930s—a “boutique” that was
“unencumbered by a large bureaucratic apparatus.” Bringing Jobs and Lasseter into the fold, they
argued, would be like bringing back Walt himself.89

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462

Almost all media commentators recognized the cultural clash that was likely to occur when a
small, independent studio was incorporated into a behemoth corporation. Who would end up
running animation in the combined entity? Or would Pixar simply be left alone, as had occurred
when Disney acquired the independent production company Miramax? Many feared the outcome
when Jobs, and his forceful personality, entered the mix in the highly-charged Disney boardroom.
“Steve Jobs on the Disney board would probably be good for Disney shareholders—but it could be
hell for those who sit around the board table with him.”90 Others wondered what was in it for Apple,
and worried that Jobs might be spreading himself too thin.91 Jobs was once again at the helm of
Apple, a company basking in the success of the iPod and poised for further product launches.
Considering Jobs’s point of view, one commentator suggested that brand association would be a
positive outcome of the deal. “Having Apple’s top executive and co-founder associated with the
world’s premier family-entertainment brand can’t help but give Apple and its products a family-
friendly stamp of approval in certain circles.”92

And then there were the financials. Investment bank analysts estimated that if Disney purchased
Pixar, it would have to pay an enterprise value fee of between $6.5 billion and $7.4 billion, given
Pixar’s $5.9 billion market capitalization. The deal would likely be done as an exchange of stock,
which, at a price of $7.5 billion, would take place at a 2.3 : 1 Disney : Pixar share exchange ratio. Credit
Suisse valuations of Pixar, which the bank compiled for Pixar’s board using a variety of techniques,
ranged from 1.093:1 to 2.365:1, although that price included the cash on Pixar’s balance sheet (see
Exhibit 11).

Many analysts believed that that the acquisition would be too expensive for Disney. The projected
price-to-earnings (P/E) ratio for Pixar was 46. DreamWorks, its closest competitor with a market
value of $2.6 billion and revenues of nearly $1 billion, had a P/E multiple of 30.93 Deutsche Bank
analysts called the potential deal “nonsensical” because it would be heavily dilutive with Disney
trading at a P/E of 17, and because of a potential creative talent exodus.94 If Pixar’s creative talent
walked out, “Disney just bought the most expensive computers ever sold,” noted Lawrence Haverty,
fund manager at Gabelli Asset Management.95

Deutsche Bank analysts rationalized that Disney could make 65 sequels to the Pixar hits for the
proposed $6.5 billion purchase price.96

Amid acquisition speculation, reports surfaced that Disney was prepared to renegotiate the terms
of the 1997 contract to cover the 2007 release of Ratatouille. Under the terms of the one-film deal, Pixar
would fully finance and retain ownership rights for Ratatouille, paying only a straight distribution fee
to Disney.

Bob Iger reflected on next steps. He believed that, as he said, “the importance of animation to
Disney over the years is obvious. Nothing creates more of an impact at this company than a
successful animated film. When we go into China, for example, it’s not because we’re called Disney,
but because of Snow White and The Lion King and Toy Story.”97 Given this, should he reengineer
Disney Animation to better compete with Pixar? Should he strike a distribution deal with another
animation studio? If he stuck with Pixar, should he negotiate a new distribution deal and at what
terms, or should he instead acquire the entire company?

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?

Exhibit 1 Animated Film Performance by Studio as of November 2005 ($ millions)

Studio Film Formata
Release

Date U.S. Box
International

Box Total Box

Disney Little Mermaid HD Nov-89 $112.0 $111.0 $223.0

Beauty and the Beast HD Nov-91 $145.9 $207.0 $352.9

Aladdin HD Nov-92 $217.4 $285.0 $502.4

Lion King HD Jun-94 $312.9 $459.0 $771.9

Pocahontas HD Jun-95 $141.6 $205.6 $347.2

Hunchback of Notre Dame HD Jun-96 $100.1 $225.2 $325.3

Hercules HD Jun-97 $99.1 $153.6 $252.7

Mulan HD Jun-98 $120.6 $183.0 $303.6

Tarzan HD Jun-99 $171.1 $264.2 $435.3

Dinosaur CG May-00 $137.8 $210.0 $347.8

Emperor’s New Groove HD Dec-00 $89.3 $70.6 $159.9

Atlantis: The Lost Empire HD Jun-01 $84.1 $84.6 $168.7

Lilo & Stitch HD Jun-02 $145.8 $127.4 $273.2

Treasure Planet HD Nov-02 $38.2 $71.4 $109.6

Jungle Book 2 HD Feb-03 $47.9 $87.3 $135.2

Piglet’s Big Movie HD Mar-03 $34.7 $39.8 $74.5

Brother Bear HD Oct-03 $85.3 $164.3 $249.6

Teacher’s Pet HD Jan-04 $6.5 $0.0 $6.5

Home on the Range HD Apr-04 $50.0 $53.9 $103.9

Average $112.6 $158.0 $270.7

Pixar Toy Story CG Nov-95 $191.8 $166.4 $358.2

A Bug’s Life CG Nov-98 $162.8 $195.2 $358.0

Toy Story 2 CG Nov-99 $245.9 $239.9 $485.8

Monsters, Inc. CG Nov-01 $255.9 $273.1 $529.0

Finding Nemo CG May-03 $339.7 $524.9 $864.6

The Incredibles CG Nov-04 $261.4 $370.0 $631.4

Average $242.9 $294.9 $537.8

DWA Antz CG Oct-98 $90.6 $91.0 $181.6

Prince of Egypt HD Dec-98 $101.2 $127.0 $228.2

Road to El Dorado HD Mar-00 $50.8 $27.0 $77.8

Chicken Run SM Jun-00 $106.8 $99.0 $205.8

Shrek CG May-01 $267.7 $238.0 $476.7

Spirit: Stallion of the Cimarron HD May-02 $73.2 $48.0 $121.2

Sinbad: Legend of the Seven Seas HD Jul-03 $26.3 $54.0 $80.3

Shrek 2 CG May-04 $441.2 $477.3 $918.5

Shark Tale CG Oct-04 $160.9 $202.6 $363.5

Madagascar CG May-05 $193.2 $327.2 $520.4

Wallace & Gromitb Oct-05 $50.0 $67.8 $117.8

Average $151.2 $169.1 $317.4

Warner Bros. Space Jam HD Nov-96 $90.4 $140.0 $230.4

Iron Giant HD Aug-99 $23.2 $6.0 $29.2

Osmosis Jones HD Aug-01 $13.6 $0.4 $14.0

Looney Tunes: Back in Action HD Nov-03 $21.0 $47.5 $68.5

Polar Express CG Nov-04 $162.8 $120.4 $283.1

Average $62.2 $62.9 $125.1

Fox Anastasia HD Nov-97 $58.4 $81.4 $139.8

Titan A.E. HD Jun-00 $22.8 $14.0 $36.8

Ice Age CG Mar-02 $176.4 $206.3 $382.7

Robots CG Mar-05 $128.2 $132.5 $260.7

Average $96.5 $108.5 $205.0

Source: SG Cowen & Co., “Walt Disney Company,” November 3, 2005, via Investext, accessed October 2008.

a HD = Hand-drawn, CG = Computer-generated, SM = Stop-motion. b Still in release at time of reporting.

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For the exclusive use of X. Chen, 2020.
This document is authorized for use only by Xuxin Chen in TBUS 400 & ELC BUS 470 SP 2020 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2020 to Aug 2020.

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462

Exhibit 5 Selected Clauses from Feature Film Agreement 1991 (13-page contract)

II. PICTURE 1 (“Toy Story”)

. . .

b. Budget. The Final Budget of the Picture 1 shall not exceed [*]a and shall be subject to the
provisions of paragraph II.I above. Pixar agrees to make changes to the screenplay and production
schedule of the Picture in order to accommodate this budget.

. . .
d. Approvals:

(i) Creative controls and decisions shall be subject to the mutual approval of
WDPc and Pixar and in the event of disagreement with respect thereto, the
decision of [*] [Walt Disney Pictures] WDPc shall be final.

(ii) Financial controls of the Picture shall be mutually retained by WDPc and
Pixar so long as the cost of production is within the approved Final Budget
amounts. If at any time the cost of production exceeds the budgeted
amounts, financial control of the picture shall be solely retained by WDPc.

. . .

III. MISCELLANEOUS: ALL PICTURES

a. Exclusivity. The services of Pixar’s animation Division including, without limitation, the
key creative Pixar talent set forth in Section III below shall be exclusive to WDPc during the Term (as
such may be extended) in all forms of theatrical motion pictures (except tradeshow demonstrations),
all forms of TV (except TV commercials), all forms of home video (except video games) and theme
parks and attractions. Pixar agrees it will not enter into a custom programming contract for non-
WDPc film projects during the Term of this Agreement. The foregoing shall not preclude Pixar from
selling standard commercial products to third parties.

. . .

k. Publicity. Pixar and WDPC shall have mutual approval of the press release regarding the
Picture. Pixar shall have a consultation right with respect to the following: i) major publicity for the
Picture, and ii) the initial U.S. advertising campaign and release pattern; provided in the event of
disagreement, WDPc’s decision shall be final.

Source: Pixar S-1 filing, October 2005, Amendment 10.4, via Thomson One Banker, accessed December 2008.

a Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.

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709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?
20

Exhibit 7 Selected Clauses from Co-Production Agreement, 1997 (43-page contract)

3. CREATIVE CONTROLS

Pixar and Disney shall collaborate in the creative process of developing and producing the
Pictures, as follows:

. . .

b. Development and Production. After approval or selection of a Treatment, Disney and
Pixar shall have mutual creative control of the further development, pre-production, and production
of each Picture, provided that in the event of a disagreement with respect to any particular creative
matter in such Picture final creative control with respect to such creative matter shall be as follows:

(i) [*] shall have [*] in any of the Pictures which [*]a;

(ii) [*] shall have [*] in any of the [*] have previously [*] for [*] with [*]; or

(iii) if neither subparagraph (i) or (ii) is applicable, the [*] and [*] shall have [*] of such [*].
The [*] shall be [*] so long as [*] is [*] (unless [*] , on [*] or [*] to [*]); otherwise [*] shall
appoint the [*], or if [*] is no longer employed by [*] will [*] the [*]. The [*] shall be [*]
so long as [*] is [*] (and not [*]); otherwise [*] (or if [*] is no longer employed by [*],
the [*] of [*]) shall appoint the [*].

c. Final Cut/Rating. Disney and Pixar shall have mutual control over the final cut of each
Picture, provided that each party shall exercise its final cut rights in good faith and so not frustrate or
delay the release of the Picture.

4. PRODUCTION

a. Production Control. Subject to the provisions of paragraph 3 above and this paragraph 4,
Pixar shall control the production of each picture. . . . Pixar shall consult with Disney concerning the
selection of the producers and directors of each Picture, provided that in the event of a disagreement
the decision of Pixar shall govern.

. . .

b. Disney Representative . . . . The Disney Production Representative shall be entitled to
maintain an office at Pixar’s facilities, to monitor production of the Pictures, to review production and
production finance books, records, and documentation, including creative materials (e.g., dailies,
story boards, and scripts), to have access to Pixar production personnel and production meetings
solely relating to the Pictures on a regular basis, and to receive periodic briefings from Pixar on
production and production finance issues. . . . The Disney Production Representative shall not have
decision-making authority over Pixar, and shall not have access to Pixar Technology (as defined in
paragraph 13c).

6. DISTRIBUTION

Disney shall have control over all decisions relating to the marketing, promotion, publicity,
advertising, and distribution of each Picture, subject to the following:

. . .
For the exclusive use of X. Chen, 2020.
This document is authorized for use only by Xuxin Chen in TBUS 400 & ELC BUS 470 SP 2020 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2020 to Aug 2020.

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462
21

b. Release Period. Disney shall initially release each Picture theatrically in the United States
either during the period from May 15 to August 15 (“Summer Period”) or during the period from
November 15 to December 31 (“Holiday Period”).

. . .

f. Consultation with Pixar. Disney shall consult with Pixar relating to all such major
marketing and distribution decisions . . . ., provided that Disney shall have the final decision on such
matters.

8. BUDGETS
. . .

c. Picture Budgets.

(i) Approval of Picture Budgets . . . . If Pixar and Disney are unable to reach agreement
on the Picture Budget within that period of time, the decision of Pixar as to the
Picture Budget shall govern, so long as such picture budget does not exceed
[DELETED] percent of the largest Picture budget for any prior Picture.

. . .

15. DERIVATIVE WORKS

b. Decision to Produce.

(i) Subject to the provisions of this paragraph 15, Disney and Pixar shall have mutual
control of whether or not to develop, produce, or otherwise exploit any Derivative Works . . . during
the term or thereafter. . . . In the event of a disagreement of whether or not to develop, produce, or
otherwise exploit any Derivative Work, Disney’s decision shall govern.

. . .

j. Theme Parks. Disney shall have the sole and exclusive right in perpetuity to use each
Picture, the characters therefore and unique story elements thereof (excluding Pixar Technology)
and/or footage from each Picture (*) in any of the following: (i) venues, retail operations, and
location-based entertainment which are not Picture-Themed Location-Based Entertainment,
(ii) Disney’s major theme parks . . . (iii) cruise ships throughout the universe (collectively “Theme
Park Rights”) with no financial obligation to Pixar.

Source: Co-Production Agreement, Walt Disney Pictures and Television and Pixar, February 24, 1997, Pixar 10K,
Amendment 10.16, via www.secinfo.com, accessed December 2008.

a Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.

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The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462
23

Exhibit 9 Disney/Pixar Deal vs. Fox/Lucasfilm Deal

Pixar/Disney Lucas/Fox

Distribution Fee 10%–15% 7%

Potential Revenue Streams 4 (box office, home video,

TV, merchandise)

2+ (box office and home video;

TV in certain territories only)

Sequels Disincentive for Sequels Sequel-Focused Strategy

Profit Split 50–50 100% wholly owned by Lucas

Source: “Pixar: The Little Studio That Did,” Bear Stearns Equity Research, October 5, 2004, via Thomson Investext, accessed
October 2008.

Exhibit 10 Stock Price Comparisons ‘96–‘05 for Disney, Pixar, and SP500 (indexed at 100)

100

200

300

400

500

600

Ja
n
-9

6
Ja
n
-9
7
Ja
n
-9
8
Ja
n
-9
9

Ja
n
-0

0
Ja
n
-0
1
Ja
n
-0
2
Ja
n
-0
3
Ja
n
-0
4
Ja
n
-0
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PIXAR

SP500

DISNEY

Source: Thomson One Banker, accessed January 2009.

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?

Exhibit 11 Pixar Valuation Methods and Implied Exchange Ratios

Valuation Method

Exchange Ratio
(Disney shares/

Pixar shares)

Discounted Cash Flow

1.093x–1.468x

Estimated cash flows from 2006–2015

Terminal value at 5%–6% growth in perpetuity

Discount rate varied between 11% and 13%

Sensitivity Analysis

1.268x–2.356x

Future box office performance assumptions

Films released increase from 1 to 1.5 pa

Discount rate range 10%–12%

Growth rate in perpetuity 4%–5.5%

Comparablesa

(Based on closing stock prices on 1/23/06)

20.0x–25.0x EBITDA for 2006

12.0x–15.0x EBITDA for 2007

Street Estimate 1.613–2.247x

Base Estimate 1.374–1.939x

Acquisitionsb in Media and Entertainment Industry

1.716 – 2.365x

Reference range 2005 EBITDA of 20.0x–30.0x

Reference range 2007 EBITDA of 15.0x–18.0x

Source: Credit Suisse presentation to Pixar Board as reported in Walt Disney Company Form S-4, February 16, 2006,
via Thomson Research, accessed October 2008.

a Disney, Time Warner, News Corp., Viacom, CBS Corp, and DreamWorks.

b Acquirer/Potential Target: Viacom/DreamWorks; Axel Springer/ProSeibenSat.1 Media; News Corp/Fox Entertainment;
Sony Corp/Metro-Goldwyn-Mayer; Comcast Holdings/The Walt Disney Co.; National Broadcasting Corp./Vivendi
Universal; Liberty Media Corp/QVC, Inc; AOL Time Warner/Time Warner Entertainment Co.; Vivendi Universal, SA/USA
Networks; The Walt Disney Co./Fox Family Worldwide; Vivendi Universal, SA/The Seagram Company; America Online,
Inc./Time Warner Inc.; Viacom/CBS Corp; The Seagram Company/PolyGram NV; Time Warner Inc./Turner Broadcasting
System; Westinghouse Electric Corp./CBS Corp; The Walt Disney Co./Capital Cities/ABC, Inc.; The Seagram
Company/MCA Inc; Viacom Inc./Paramount Communications; Matsushita Electric Industrial/MCA Inc.; Time Inc./Warner
Communications Inc; Sony Corp./Columbia Pictures Entertainment.

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462
25

Endnotes

1 Nick Wingfield and Merissa Marr, “Disney, Pixar Keep Investors on Seats’ Edge,” Wall Street Journal,
December 15, 2005, via Factiva.

2 Nick Wingfield and Ethan Smith, “Video Comes to the iPod—In Deal With Disney, Apple Will Sell Hit
ABC TV Shows at Its iTunes Store for $1.99,” The Wall Street Journal, October 13, 2005, via Factiva, accessed
January 2009.

3 Joe McGowan, “How Disney Keeps Ideas Coming,” Fortune, April 1, 1996, p. 131, via ABI/Inform, accessed
October 2008.

4 Ibid.

5 Laura Martin and Catherine Tran, “Walt Disney,” Credit Suisse First Boston Equity Research Report,
March 23, 1999, via Investext, accessed October 2008.

6 Joe McGowan, “How Disney Keeps Ideas Coming,” Fortune, April 1, 1996, p. 131, via ABI/Inform, accessed
October 2008.

7 Richard Turner, “Jungle Fever: Disney, Using Cash and Claw, Stays King of Animated Movies,” Wall Street
Journal, May 16, 1994, p. A1, via Factiva, accessed October 2008.

8 Ronald Grover, “Michael Eisner Defends the Kingdom,” BusinessWeek, August 4, 1997, pp. 73–75,
via Business Source Complete, accessed October 2008.

9 Ibid.

10 Ibid.

11 David Lieberman, “Karmazin Invaluable to Viacom—Is He Indispensable?” USA Today, January 27, 2003,
via Factiva, accessed January 2009.

12 “The New Generation of Animated Films Will be for Grown-Ups,” The Independent, April 29, 2001,
via Factiva, accessed January 2009.

13 “Disney Explains Katzenberg’s Departure,” Reuters, August 25, 1994, via Factiva, accessed November 2008.

14 Bruce Orwall, “Rated PG—But Not Made for Kids,” Wall Street Journal, June 24, 2000, p. B1,
via ABI/Inform, accessed November 2008.

15 Ibid.

16 David A. Price, The Pixar Touch (New York, NY: Knopf, 2008), pp. 227–228.

17 Bruce Orwall, “Comics Stripped: At Disney, Sting of Weak Cartoons Leads to Cost Cuts—Animation
Studio Halves Staff, Questions Crowd Scenes; ‘Things You Can’t See’—‘Lilo & Stitch’ Make a Budget,”
The Wall Street Journal, June 18, 2002, p. 1, via ABI/Inform, accessed October 2008.

18 Ibid.

19 Ibid.

20 Ibid.

21 Merissa Marr, “Pixar to the Rescue,” Wall Street Journal, January 20, 2006, via Factiva, accessed November 2008.

22 David A. Price, The Pixar Touch (New York, NY: Knopf, 2008), p. 242.

23 Sharon Waxman, “Universal Hesitated, and a Hungry Rival Made the Right Moves,” The New York Times,
December 12, 2005, via Factiva, accessed March 2009.

24 Andrew Bary, “Coy Story,” Barrons, October 13, 2003, p. 21, via ABI/Inform Global, accessed August 2008.

25 “Jobs’ Pixar in 10-Year Deal with Disney,” PC Quest, April 1, 1997.

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?

26 Alex Grove, “Quality is Jobs 1—Pixar CEO Steve Jobs Heralds 3D Animation as a New Medium,”
The Red Herring, February 1, 1996, via Factiva, accessed August 2008.

27 Pixar Annual Report, 2002, Secinfo.com.

28 Brent Schlender, “Steve Jobs’ Amazing Movie Adventure,” Fortune, September 18, 1995, p. 154,
via ABI/Inform, accessed August 2008.

29 Brent Schlender, “How Disney Knew It Needed Pixar,” Fortune, May 29, 2006, p. 146, via ABI/Inform,
accessed August 2008.

30 Burce Orwall, “Interview—What’s the Buzz?” The Wall Street Journal, March 19, 1998, via Factiva, accessed
October 2008.

31 Peter Burrows and Ronald Grover, “Steve Jobs, Movie Mogul: Can He Build Pixar Into a Major Studio?”
BusinessWeek, November 23, 1998, via Factiva, accessed March 2009.

32 Jonathan Loades-Carter, “Joy Story: Pixar’s Rollercoaster Ride,” Financial Times, January 19, 2006, via Factiva.

33 Brent Schlender, “How Disney Knew It Needed Pixar,” Fortune, May 29, 2006, p. 146, via ABI/Inform,
accessed August 2008.

34 Disney to Acquire Pixar, Disney press release, January 24, 2006.

35 Shellie Karabell, interview with Steve Jobs, Dow Jones Investor Network, April 29, 1996, via Factiva,
accessed August 2008.

36 Pixar Annual Report, 2002, Secinfo.com.

37 Richard W. Stevenson, “Pixar Opens Horizons for Pluto, Dumbo et al.,” New York Times, August 4, 1991,
via Factiva, accessed August 2008.

38 Pixar Form S-1, October 10, 1995, p. 9, via Thomson One Banker.

39 Shellie Karabell, interview with Steve Jobs, Dow Jones Investor Network, April 29, 1996, via Factiva,
accessed August 2008; “Jobs’ Pixar in 10-Year deal with Disney,” PC Quest, April 1, 1997, via Factiva, accessed
August 2008.

40 Shellie Karabell, interview with Steve Jobs, Dow Jones Investor Network, April 29, 1996, via Factiva,
accessed August 2008.

41 Thomson One Banker tearsheet, accessed August 2008.

42 “Jobs’ Pixar in 10-Year Deal with Disney,” PC Quest, April 1, 1997, via Factiva, accessed August 2008.

43 “Disney and Pixar Announce Five-Picture Deal; Disney to Buy up to 5 Percent of Pixar,” Business Wire,
February 24, 1997, via Factiva, accessed August 2008.

44 Andrew Barry, “Coy Story,” Barron’s, October 13, 2003, via ABI/Inform Global, accessed September 2008.

45 Bruce Orwall and Nick Wingfield, “The End: Pixar Breaks Up With Distribution Partner Disney,” Wall
Street Journal, January 30, 2004, p. B1, via ABI/Inform, accessed August 2008; Peter Thal Larsen, “As a Hit
Partnership Ends, Hollywood Rivals Prepare to Land a Monster Deal: The Disney Days are Over,” Financial
Times, January 30, 2004, p. 18, via ABI/Inform, accessed August 2008.

46 “Walt Disney Co.,” Citigroup Smith Barney analyst report, October 22, 2004, via Investext.

47 “Pixar Animation Studios,” Robertson Stephens, Inc., May 9, 2002, via Thomson Investext, accessed
October 2008.

48 “Walt Disney Co.,” Deutsche Bank analyst report, January 30, 2004, via Investext.

49 Pixar Form 10-K, December 28, 2002, via secinfo.com.

The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? 709-462

50 Laura Holson, “Pixar, Creator of Finding Nemo, Sees End to Disney Partnership,” The New York Times,
January 30, 2004, via Factiva.

51 Katherine Stynopias, “DreamWorks Animation SKG,” Prudential Equity Group LLC Research, November
17, 2005; and “Pixar,” February 7, 2004, via Thomson Investext.

52 Ibid.

53 Ron Grover, “Toy Story 3: Out for Blood,” BusinessWeek Online, September 28, 2001, via Factiva, accessed
January 2009.

54 Claudia Eller and Richard Verrier, “Pixar Ends Filmmaking Partnership with Disney,” Los Angeles Times,
January 30, 2004.

55 “Looking Beyond the Mouse,” The Economist, January 26, 2006, p. 74, via ABI/Inform, accessed August
2008.

56 “Finding Another Nemo,” The Economist, February 7, 2004, p. 70, via ABI/Inform, accessed August 2008.

57 Peter Thal Larsen, “Jobs Lashes Out at Eisner and Disney,” Financial Times, February 5, 2004, p. 29,
via ABI/Inform, accessed August 2008.

58 “Finding Another Nemo,” The Economist, February 7, 2004, p. 70, via ABI/Inform, accessed August 2008.

59 Bruce Orwall and Nick Wingfield, “The End: Pixar Breaks up with Distribution Partner Disney,” Wall
Street Journal, January 30, 2004, p. B1, via ABI/Inform, accessed August 2008.

60 Desa Philadelphia, Jeffrey Ressner, and Sonja Steptoe, “But Who Gets the Kids?” Time, February 2004,
p. 19, via ABI/Inform, accessed August 2008.

61 Ellen Lee, “Pixar Animation Studios’ Earnings Soar,” Knight Ridder Tribune Business News, August 8,
2003, via ABI/Inform.

62 “Disney, Pixar End Highly Successful Partnership,” Knight Ridder Tribune Business News, January 30,
2004.

63 “Pixar Dumps Disney,” CNN, January 30, 2004, via www.cnn.com.

64 Ronald Grover, “Pixar Twists the Mouse’s Tail,” BusinessWeek, February 2, 2004, p. 1, via ABI/Inform.

65 Bruce Orwall, “Can Disney Still Rule Animation After Pixar?” Wall Street Journal, February 2, 2004, p. B1,
via Factiva, accessed November 2008.

66 Alex Grove, “Quality is Jobs 1—Pixar CEO Steve Jobs Heralds 3D Animation as a New Medium,”
The Red Herring, February 1, 1996, via Factiva.

67 Ed Catmull, “How Pixar Fosters Collective Creativity,” Harvard Business Review, September 2008.

68 Glenn Whipp, “Swimming Against the Tide: Pixar Crew Encourages Limitless Creativity and Interaction
at Enormous Bay Area Building,” Los Angeles Daily News, May 30, 2003, via Factiva, accessed October 2008.

69 Brent Schlender, “Steve Jobs’ Amazing Movie Adventure,” Fortune, September 18, 1995, Vol. 132, No. 6,
via Factiva, accessed October 2008.

70 Ibid.

71 Ed Catmull, “How Pixar Fosters Collective Creativity,” Harvard Business Review, September 2008.

72 Ibid.

73 Christopher Borrelli, “Walt Disney Version 2.0: John Lasseter, The Vision Behind Pixar, Becomes the Voice
of American Animation,” The Blade, June 4, 2006, via Factiva.

74 Ed Catmull, “How Pixar Fosters Collective Creativity,” Harvard Business Review, September 2008.

75 Ibid.

709-462 The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?
28

76 Bruce Orwall, “Interview—What’s the Buzz?” The Wall Street Journal, March 19, 1998, via Factiva, accessed
October 2008.

77 Ibid.

78 Bruce Orwall, “Can Disney Still Rule Animation After Pixar?” Wall Street Journal, February 2, 2004.

79 Greg Sandoval, “New Competitors Want Slice of Pixar’s Pie,” Associated Press, December 8, 2005, via Factiva.

80 Jason Solomons, “Me and My Troll,” The Observer, July 4, 2004, via Factiva, accessed November 2008.

81 Ibid.

82 Ibid.

83 “Walt Disney Company,” SC Cowen & Co. analyst report, November 3, 2005, via Investext.

84 Christopher Parkes, “Animation Captures Studios’ Imagination,” Financial Times, December 13, 2004, p. 27,
via Factiva, accessed November 2008.

85 “DreamWorks Animation SKG, Inc.,” Credit Suisse Equity Research, October 3, 2006, via Thomson
Investext, accessed November 2008.

86 Joshua Chaffin and Aline Van Duyn, “Deal Would Buy Disney Some Magic,” Financial Times, January 20,
2006, p. 30, via Factiva, accessed October 2008.

87 Arik Hesseldahl, “Apple’s Tomorrowland,” BusinessWeek, January 26, 2006.

88 Maya Roney, “Disney’s Pixar Buyout a ‘Near-Perfect Strategic Fit,’” Forbes, January 25, 2006,
via Forbes.com.

89 Neal Gabler, “When You Wish Upon a Merger,” New York Times, February 2, 2006.

90 Ronald Grover, “Will Steve Jobs Be Disney’s Big Cheese?” BusinessWeek, January 20, 2006,
via businessweek.com.

91 Arik Hesseldahl, “Apple’s Tomorrowland,” BusinessWeek, January 26, 2006.

92 Ibid.

93 Nick Wingfield and Merissa Marr, “Pixar, Disney Keep Investors on Seats’ Edge,” Wall Street Journal,
December 15, 2005, via Factiva.

94 Doug Mitchelson and Garrett Edson, “Pixar: Pixar Purchase Would Be Nonsensical,” Deutsche Bank
Company Alert, December 15, 2005, via Investext.

95 “Looking Beyond the Mouse,” The Economist, January 26, 2006, p. 74, via ABI/Inform, accessed August
2008.

96 Doug Mitchelson and Garrett Edson, “Pixar,” Deutsche Bank equity report, December 15, 2005.

97 Brent Schlender, “How Disney Knew It Needed Pixar,” Fortune, May 29, 2006, p. 146, via ABI/Inform,
accessed August 2008.

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