A long sleepless night

[just_an_ant]

I thought about it long and hard last night about selling all my Pixar Stock, shoot I was up til a good 1:00am in the morning. And on top of that the uneasy feeling of "accepting the rumor" when I have PIXR valued at a $105 or so by December 2007.

I own all my shares in IRAs (mostly in ROTHs - so my gains are tax free - so I can sell freely)

I have not sold a single share since the announcement.

--------

Would you have owned Apple before Jobs came back? In hindsight should you have had (I wish I did when he returned).

Would you have owned Disney before "The Disney" came back? Hell no!! She's a flatliner. As investors in Pixar we know who has the "heart and soul".

The opportunity is tremendous (there is obvious risk); but the three (Steve,John,Ed) along with Iger (his career at stake) not to mention Cook and Disney's CFO seem to form as strong as team as any I know inside of a company.

The best change happens from "within" first. A company and leader realizing that and getting better and stronger people in place will build a high probability for success.

Disney was built on animation. It lost animation and its stock dropped and has traded sideways. It now has it back; not only back, but the undisputed leader under its house.

I am optimistic that Disney could trade near $50 by December 2007. The probability isn't as high as I had Pixar on its own, but Disney will rise again.

It sorta reminds me of how we used to view Pixar; Pixar wasn't a play trading sideways inbetween 2 years waiting for the next film. We got excited (and dramatic run up) when Pixar was about to go on own; continued to make big profits; near new distribution deal and one film a year.

While 2008 seems the year "everyone" is looking at and will taut Disney as re-established and raised expectations; its the work and change over the next year / year and half that will have the biggest impact (5-10 years out).

If DIS is out of favor, I welcome it whole-heartedly like I did Pixar during "the days"; I am not betting against something that is 6 for 6 and ready for 7 for 7, followed up by 8 for 8 and a big dynamic change to the culture of a mega media player with content out the ying yang.

Failing isn't an option with this team. As they say, "They will burn in hell if they do".

[greykitedad]

I'm as disappointed as anyone, but hope for the best for Pixar and Disney together. I've been watching Pixar from the very start. I remember looking agog at a Chap image computer displaying a 3-D transparent reconstruction of a woman's abdomen after a c-section. Bone was in white, flesh in translucent pink and the detail was incredible. The entire volume was reconstructed from a series of CAT scan slices. It was magnificent, the guys showing it were pumped (Catmull was there) and I was hooked.

I wasn't invested in Pixar until the IPO, so there were many years where my admiration wasn't clouded by investment ;-) Now I suppose I'm back to those days, watching Pixar's magic but unable to say I'm a part of it. My son is just getting ready to invest his intinerant musician tips, and was excited about getting Pixar pre-cars. He's an unhappy little man. And I'm an unhappy big one.

But that's that. We can enjoy from afar and find other ways to pay for college and retirement.

[tbstheman]

Fortunately I was away from Internet/TV Tuesday night. Because I would have been extremely disturbed by the news.

Let me start with the following - I believe most of these behemoths (DIS, TXT, GE, C etc) would be more valuable if they were broken up. I have personally found "synergies" spouted off by corporate executives just flat out don't exist. Executives in these companies do not look any further than their pocketbook to decide how to run a company. They think it would be cheaper to aquire and use a company rather than pay them full value for their product.

I'll be putting together Pixar valuation numbers. Hopefully, I can see mathematically if this is a "true" value.

My flat out biggest problem is that I have had no interest in buying / owning Disney stock. I certainly didn't care for Eisner, and I have not been impressed by Iger's publicity.

[suzannefuzzberger]

While I did not lose any sleep, it certainly was a surprise that Steve Jobs threw in the towel! The marriage is a good fit for both companies, but I cannot bring myself to reconcile DIS book value (I look at book value as only real assets/liabilities ... less goodwill, intangibles, etc):

PIXR = 5
DIS = 43

I simply connot bring myself to hold a company that is valued at 43x its tangible assets! While P/B of one is likely too cheap, 43x is insane.

Suz

[dumbledor111]

Even as a Disney guy first, I never really wanted a buyout. Although I haven't lost sleep (my Pixar holdings are far less than my Dis holdings) you might say I've been holding my breath in hopes that Disney will keep their meathooks off Pixar and not try to change their operations. If they can and Pixar talent rmains, I see very good things in the future.

dumbledor

[tbstheman]

Still going through all the Pixar numbers. Read the Material Agreement. How many times can lawyers say the same thing??

Here's a short argument why I'm voting NO:

Pixar was entering a growth stage.
Pixar was on the verge of releasing one movie per year. Add to this, with the next release, Pixar would (arguably) be keeping 80% of the revenues.
Pixar is considered the best animation studio.

For this, we get, a what 10% (at best) premium for our shares today??

Risks:
There were 2 primary risks of owning Pixar stock.
1. A box-office bomb. That would put substantial downward pressure on the stock. In it's history, Pixar had only box office success.
2. Lasseter, Catmull or Jobs status at Pixar change drastically.

Both of these risks have been mitigated.
1. Pixar now has over $1B in cash. Though a boxx-office bomb would hurt credibility, cash flow and it's ability to operate would be fine.
2. Brad Bird, Peter Doctor, Andrew Stanton, etc. Pixar has essentially bred a set of directors that appear capable of stepping in on the creative end and keeping Pixar movies top of the line.

Disney Risks:
1. Merging with Disney only mitigates a box-office bomb. But that's not really true. If the first co-branding movie bombs, every analyst on Wall St will tell us to sell Disney stock because they ruined Pixar.
2. Owning Disney gives us dozens of new risks:
Terrorist attacks: Disney's theme parks were massively damaged due to 9/11.
Broadcast network failure: If ABC's new schedule bombs we could get crushed. If the NFL goes on strike, ESPN could get crushed.
Iger doesn't cut it: Iger has been on the job for less than 6 months. There is no current solid proof he can "fix" the problems with Disney. Let's face it, if not for Desperate Housewives and Lost, he wouldn't even be working for Disney.

[greykitedad]

If the deal falls through, will you sell your PIXR? I would. A "no" vote is a vote of "no confidence" in Jobs. Would you want to own stock in a company run by a person who does not believe in your vision?

Jobs is the majority shareholder in Pixar, and I think he's a good bit of its soul too. From everything I've read, Lasseter and Catmull have gotten along well with Jobs, and are looking forward to this new opportunity. This hardly seems like a decision Jobs made in a vacuum.

Going it alone would have required Pixar to grow in "non-creative" areas. Of course Lucas did it, but after nearly three decades of licensing his movies for external distribution he has amassed a personal fortune smaller than Jobs half of Pixar. Imagine what you'd have gotten as a shareholder if he'd gone public. If that is the model you were lusting after, caveat emptor.

I think it's unwise to expect that Steve Jobs will run Pixar as if he was just a CEO beholden to external shareholders. When Pixar went public, they let us in on a vision and they're unwilling to compromise it. If you believe they are being true to the vision, you vote "yes". If you believe they are not, you vote "no".

As I see it, my vote, though enabled by my investment in Pixar, is separate from my investment in Pixar. I can imagine voting "yes" and selling my shares, but I cannot see voting "no" and keeping them.

I would never invest in a company if I did not trust the management team to make the right decisions. While it's perfectly reasonable to vote NO if you believe they made the wrong one, I would question the wisdom of staying invested in the company after that point.

Here's what will happen if the deal breaks.

1) Pixar will owe Disney $210 million, which will wipe out 2006 earnings.

2) Ratatouille may have to be delayed, as any marketing work done on it will have been done by Disney and there will be precious little time to secure the partners and deals to serve Rats well.

Between those two events, I would expect Pixar's share price to take the biggest hit we've seen in years.

So, in addition to the logical inconsistency of voting "no" confidence on the managers of an investment you keep in their hands, there is significant downside risk to a successful "no" vote. It is my responsibility to protect my family's investments. Staying in PIXR while voting "no" seems irresponsible.

I have not sold my PIXR yet, but might take some off the table to put in AAPL (I bought a tiny bit Friday). I have confidence in Jobs' visions, and in his ability to execute them.

So:

Am I happy about the deal?
No, but not because I think it's the wrong decision, but because it was not what I anticipated.

Will I vote yes?
At this point, yes. I'm not sure I want the excitement that would come with a development that changes my mind

Do I think they could have done better on their own?
I did until this announcement. Now I don't.

Will I keep my shares?
Some, probably not all.

I will dearly miss being part of the pure play. At every new movie release (which we made an extended family event), I cut out a small piece of paper that represented our portion of Pixar. I held it up to the screen to see how much of the masterpiece we owned. That piece just got a lot smaller.

[greykitedad]

TBS:

"There is no current solid proof he can "fix" the problems with Disney. Let's face it, if not for Desperate Housewives and Lost, he wouldn't even be working for Disney."

You've been listening to DIY too much. Your first statement about "proof" is a tautology. There is never proof that something can be fixed until it IS fixed.

Your second statement is stated as fact ("Let's face it") when it is really your opinion.

I will argue that bringing in Pixar was the best move Iger could have taken to fix Disney. It's not proof, but I think it's a good decision. (And perhaps not as risky for Iger as some think, as Jobs has made a point of saying that he bought into Iger's vision, so maybe Iger has just turned the Holy Trinity into the Holy Quartet.)

The question is, what do you do with your money while waiting for the truth? I'm still thinking about that.

[just_an_ant]

:)First off - congrats grey for being the first to reach 10 posts and enter the "Pixarian Captain" level

As an independent I could easily picture Pixar as a $10 billion dollar company; in fact I expected it to be close to $12 billion by end of next year (Dec 07) - based on earnings.

After that it hits a somewhat "mature" status where it does one film a year; was it possible for it to continue to grow to $24 billion in another 4-5 years (2011/2012)? Half the market cap of what Disney is today? With Disney creating $4+ billion in operating cash each of the last 2 years.

Basically a little over 3x return from the buyout price of $7.4 billion in todays dollars.
Seems like very high risk for high reward. By the way, I always feared the "big one' in California and it's impact on Pixar and the Emeryville campus. Poof..investment mostly gone.

This "merger" really softens the risk associated (beta) with Pixar. If existing Disney can just grow 10% ($5 billion a year) in 5 years that 25 billion (simple calculation method..not doing growth on growth) - the stock has been flat for last five..so it's almost averages to just 5% last 10 years. Add on top of this the "stand alone Pixar now operating inside of Disney" - $24 billion value (if it does what it would have done on its own); you then have a $99 billion dollar company.

The model doesn't even factor any cost savings of them being merged, but go ahead and count that towards Disney's "growth"..lol - I don't care.

A 2x bagger in 5 years. That's a very good return; when it typically takes a 12% annual return to double in 7 years.

Less risk, less return; as an investor I can live with that. As a family man, I'm happy to see the family "together" as they should be (shoot...being engaged for 15 years..and now just getting married..HELLO!)

I'm thankful time allowed PIXR to grow by leaps and bound last 5 years; while Disney stood still. Now Disney appears ready to grow. It's already has the "out of flavor/favor" status and seems ready for a turnaround and new direction after the Eisner era of the last 5 years.

[iworkatpixar]

" was it possible for it to continue to grow to $24 billion in another 4-5 years (2011/2012)?"

We'll never know, of course, but I suspect not. I think, with the stock up at $59, it might have stagnated for a while, waiting to catch up with itself. Analysts who thought we were going to just start producing 2 films/year were/are nuts, IMO.

As for Earthquake risks -- negligible at best. Steve had the building designed using a design the Japanese use -- because Emeryville is in a "liquefaction zone," the entire building is built on isolators, allowing it to shift laterally up to 24". Short of California falling into the ocean, we ought to survive the Big One with little difficulty. (Though perhaps some people may be camped out living in the building for a bit...!)

[greykitedad]

Do I get a captain's hat, or a compass?

I hope others join and contribute soon.

What I don't understand is how people think Pixar on it's own is a good idea now that Jobs has shown his interest lies in another approach. From what I've read, Lasseter and Catmull are on board, and I expect the rest of the team is too. TCW might not like the loss of the pure play either, but I don't think they see value in voting against the judgement of Jobs and crew. They'll vote yes and sell if they don't like the deal. If they break the deal, 20% of Pixar's cash goes into Disney's pocket.

For those two reasons (leadership's vision and the penalty), I think Pixar will tank if the deal falls through. I think TCW will see it the same way. If anyone can come up with a plausible reason for TCW to vote "no", I'm all ears.

[just_an_ant]

I fear the "bath" event. I figured design was in place..but if there is no "land" underneath - I didn't think there was an "atlantis miracle" to save the empire.

The runup to $60 sorta reminded me of what was likely the 1998's all over again in a couple of years (2008). However, I still felt there was room for further upside as analyst continued to try and figure out the new Pixar distribution and profit scenario of going alone.

However, while I expected Pixar to continue to produce hits, I also expected Disney to destroy to certain extent the value that was previously created. So everytime Disney was taking $1 billion out of Pixar's market cap for destroying a franchise (insert a Pixar movie here other then ABL), Pixar was adding a new $1 billion dollar franchise. So it would just tread along like the 1998-2002 era in the years 2008-2012. Relatively flat (sorta like Disney last 5 years)

I don't appear to have to worry about "disney" sequels now. I can trust to certain amount that the existing character franchises will retain long-term value and at the same time Pixar can add to that stable of franchises and create new ones.

This restores Disney animation and at same time entrusts Pixar.

It's obviously very earlier, but there appears to be big dividends in my eyes if the vision unfolds.

[tbstheman]

grey

"If the deal falls through, will you sell your PIXR? I would. A "no" vote is a vote of "no confidence" in Jobs. Would you want to own stock in a company run by a person who does not believe in your vision?"

I would say that a "NO" vote is a vote against this single decision.

I would say that selling your shares is a "no confidence" vote in Jobs and Disney.

Right now, I am not selling my shares. As for the $210M one-time charge - I would live with it. Check out Disney - they've taken (I believe) 3 one-time charges in the last 9 quarters. I know for a fact they took one last quarter.

More later.

[greykitedad]

That "single decision" is the most important in Pixar's history. The only vote besides Jobs' that counts is TCW's. I don't see them voting no.

Selling shares is seldom vote of "no confidence". I sold Pixar several times over the years, and bought it back for less (most times ;-). Don't confuse confidence in management with confidence in the stock price. They are barely related in the short term. For the next little while, DIS price performance will be driven by pure DIS economics and some discounted expectations for Pixar to help in the long run. If I don't like what I see near term, I'll sell, and come back when I see Pixar starting to have an effect (or see the market thinking Pixar is having an effect ;-). I have confidence in Jobs, but it might take a little time.

Look at Job's return to Apple. APPL didn't start rising the day he returned, it went down (because everybody thought Apple overpaid for NeXT, sound familiar?). It took a couple years to turn things around. I expect the same will happen here (not that DIS will go down, but that Pixar's effect won't be seen tomorrow). Just because Jobs had to tie up most of his net worth in Disney right now doesn't mean we must.

Nixing the deal creates a $210M one-time charge, AND is a vote of "no confidence" in Jobs. Has Disney ever taken a one time charge that wiped out an entire year's earnings? Jobs hasn't been handed such a defeat since his ouster from Apple in 1985. I certainly wouldn't want to be holding a bunch of PIXR stock on the day the deal got squashed. What it would boil down to is TCW and some insiders telling Jobs that he's wrong. I think if that happened, the class action lawsuit might get some teeth and you'd see even more earnings taken away. It's a scenario that looks pretty gruesome to me.

Be careful that voting your conscience doesn't raid your wallet.

BTW, I have no problem with one-time charges if they're for a good reason.

And remember, though you may think the market's perception of Pixar's potential (which is reflected in the stock price) is wrong, it is the market that sets the price. If you have a choice between bring "right" and making money, which will you choose?

[iworkatpixar]

I don't think a "no" vote is likely. The hope is to finish this off in 90 days! (They believe that as long as the Justice department doesn't think there's an anti-trust issue, which there isn't, that they can get it done by then.) If you know anything about M&A, you know that for a deal of this size, that is *******fast*******.