The learning objective of this supplement to enable students to cal- culate a companys value based on its funding, identify the events in a companys history that increase its value, and explore how increased enterprise value leads to changes in founder and investor wealth. The common thread of an entreprenurial journey involves risk and return. As an enterprise evolves from idea to product to commercial market to profiabiity its risk profile softens. Founders always carry the largest risk burden. Successful founders often see significant returns. Most entrepreneurs monetize their investments through an initial public offering or by being acquired. Use the data provided in this case to answer the case questions. Case Questions 1. Identify 5-7 events from the history of Pixar prior to being acquired by Disney that may have impacted the value of Pixar. 2. Create a funding waterfall for Pixar including the following levels: a. Jobs acquisition of Pixar from Lucasfilm; b. Jobs funding of Pixar; c. Pixars public listing; and, d. Disneys acquisition of Pixar. 3. What was Steve Jobs Pixar-related wealth at the time of: a. Pixars public listing; and, b. Disneys acquisition of Pixar. 4. What was Steve Jobs return on his founding Pixar invest- ment? 5. Using the Bloomberg Terminal to gather valuation data to help, determine if Disney paid too much for Pixar? 8FundingDisney Case

2 A Short Pre-Disney History of Pixar The Apple II, a technological innovation responsible for ushering in the personal computer revolution, was released in April 1977. This early computer was a primitive machine with four kilobytes of internal memory and completely dependent upon two floppy disk drives output- ting to a green low-resolution monochrome monitor. At the same time, George Lucas was developing Star Wars and strug- gling to find a way to incorporate special effects that would convince viewers they were travelling through space and visiting uncharted plan- ets. Lucas tried to build a team of effects experts by picking over the leaders of 20th Century Foxs in-house special effects department which had recently been dismantled. Douglas Trumbull, best known for his work on 2001: A Space Odyssey, was committed to Steven Spielbergs Close Encounters of the Third Kind (1977) but suggested his assistant John Dykstra as a possible candidate to lead Lucas new group. Dykstra pulled together a small team of college students, conventional artists, and engineers and set up shop in a warehouse in Van Nuys, Cal- ifornia and called the group Industrial Light and Magic (ILM). Since its formation, ILM has become the benchmark for realistic, compelling, and prescient, special effects. Star Wars owes much of its success to the power of its special effects. Although in nacient development and completely unused in the early Star Wars francise films, Lucas was convinced that computer technol- ogy could eventually play a critical role in special effects. However, after a thorough assessment of the state of computer technology, Lucas concluded that no individual firm nor any group of firms together were on the path to developing useful computer technology capable of devel- oping the computerized effects he wanted. He would need to build his own computer division. Ed Catmull was hired away from the New York Institute of Tech- nology in 1979 to head Lucasfilms computer division. Lucas wanted Catmull to do three things: 1. develop a computer system that could edit a films visual and audio components digitally; 2. create a laser printer capable of exporting images and sound directly to film; and 3. generate graphical in digital format. John Lasseter, who began his animation career as a student at Cal Arts, a school founded, funded, and patterned on Walt Disneys animation, was fired from The Walt Disney Company for promoting computer animation. He joined the computer graphics division of Lucasfilm in 1983 where he combined his animation skills and directors flair with the groups technological capability. Start Trek II: The Wrath of Khan includes a simple scene of the Gene- sis Effect where a lifeless planet is rapidly transformed by lush vegeta- tion. The whole scene was generated in a computer animated sequence by the Lucasfilm computer division. The first of its kind. Other small projects incrementally refined the groups capabilities until they were w

3 asked to make a stained glass knight emerge from a window and walk in the movie Young Sherlock Holmes. By Spring of 1985, the computer divisions technology, Marionette and RenderMan, set the technologial standard in film industry but commer- cial success was still far away. Meanwhile, Steve Jobs was forcibly and very publicly removed from Apple Computer Company, which he started in 1976 and developed into a multi-billion dollar enterprise. Jobs was introduced to Pixar by Alan Kay, a computer scientist and personal friend of Jobs. On 30 January 1986, Jobs purchased the Lucasfilm computer division which had been named Pixar and only had forty employees, for $10 million. Over the next decade Jobs wrote personal checks of $60 million to support Pixar. In 1988 Pixar rleased Marionette, a proprietary animation system in addition to RenderMan, a proprietary rendering software. Sales of Marionette and RenderMan continued to be soft. But a re- markable combination of leading technology and a craftsmans ability to tell stories in John Lasseter led to production of computer generated animation in short films and advertising spots. Lasseter and Bill Reeves received an academy award for their short Tin Toy, which became a platform for their first full-length motion picture, Toy Story. Integration of computer animation into commercial advertising spots also provided Pixar with a little walking around money including spots for Tropicana, Trident, and others. Disney which used to look disdainfully on computer animation, was taking a fresh look through the eyes of their new CEO, Michael Eisner. Eager to return Disney to the glory days when it sat as the animation innovator, Eisner was convinced that Pixars technology was well ahead of the competition. Pixars technology was incorporated release of Beauty and the Beast in 1991. Steven Spielberg used Pixar technology in Jurassic Park to generate photorealistic images of dinosaurs. Pixar was a technological marvel. But it was unprofitable. Even Steve Jobs was getting impatient with the companys inability to find a business model that could monetize its technology. With the survival of Pixar at stake, John Lasseter pitched Disney with an idea that would bring in needed cash. But Disney had different plans. They were trying to woo Lasseter to be a Disney director. Lasseter came up with the idea of a Christmas special from a toys perspective. Pixar would produce the movie and Disney would distribute it. After a string of failures and lessons, Toy Story was created. Toy Story was released on Thanksgiving Weekend in 1995. It opened at #1 and would become the highest gross- ing film of the year, making $192 million in the United States and $362 million worldwide. The completion of Toy Story taught the company a lot about computer animation. It also taught them a lot about business. The company had given away much of the positive economic benenfit of its first hit to Dis- ney. Jobs sat down with the company and determined they needed move from being a production company to being a studio. Such a move would require a lot of capital. At the end of Toy Storys first week, Pixar listed w

4 its shares in the largest initial public offering of the year. The company sold $132 million in stock for $22 per share. Steve Jobs, the companys largest shareholder, still held 80% of the companys stock. From Pixars IPO to Disneys acquisition of the company for $7.4 billion in May 2006, Pixar produced seven animated feature films, all of which were blockbusters. Pixar Animated Feature Productions Productions through Acquisition, Box Office Receipts are in US$ Millions Release Title US Box Office Global Box Office Nov 95 Toy Story 191.8 373.6 Nov 98 A Bugs Life 162.8 363.0 Nov 99 Toy Story 2 245.9 497.4 Nov 01 Monsters, Inc. 255.9 543.4 May 03 Finding Nemo 339.7 899.2 Nov 04 The Incredibles 261.4 633.0 Jun 06 Cars 244.1 462.2 Factors Impacting Pixars Value 1. Identify 5-7 events from the history of Pixar prior to being ac- quired by Disney that may have impacted the value of Pixar. Hints: Any event that reduced the risk of Pixar is likely to increase its value. For example, execution risk can be reduced by hiring key employees, setting up processes, establishing a better strategy, or improving technology. Funding risk may be ameliorated thorugh solidi- fication of anchor investors, contracts, or initial successes. Pixar Funding and Valuation Waterfall Steve Jobs purchased the company from Lucasfilm for $10 million and invested an additional $60 million in the company. Assume that until the company went public, Steve Jobs held 100% of Pixars shares. After Pixar went public it had 96.3 million shares outstanding and 80% of those were held by Steve Jobs. The shares were listed at $22 per share. Pixars shares were publicly traded from 28 November 2006 to 8 May 2006, when Pixar was purchased by Disney for $7.4 billion. 2. Create a funding waterfall for Pixar. Include the following levels: a. Jobs acquisition of Pixar from Lucasfilm; b. Jobs funding of Pixar; c. Pixars public listing; and, d. Disneys acquisition of Pixar. Hint: Consider using a table like the one below. Capital is the amount of money put in. Value is what it is worth a a point in time.w

5 Pixar Funding and Valuation Waterfall Selected Transactions and Descriptions Round Capital Value Seed / Founder Growth IPO Disney Steve Jobs Pixar Wealth 3. What was Steve Jobs Pixar-related wealth at the time of: a. Pixars public listing; and, b. Disneys acquisition of Pixar. Steve Jobs Investment Return 4. What was Steve Jobs return on his Pixar investment? Disneys Pixar Valuation 5. Did Disney pay too much for Pixar?