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Pixar, Disney More Than Mend Fences

When Walt Disney Co. CEO Bob Iger told media and investors shortly after assuming that role Oct. 1 that one of his first priorities would be to mend the relationship with Pixar Animation, he wasn’t just blowing smoke.

According to a proxy statement filed with the Securities and Exchange Commission last week, Iger made a presentation to Disney’s board of directors the day after he assumed the CEO job from the retiring Michael Eisner, stressing the importance of animation to the Disney business and floating the idea of a merger with the computer-generated animation giant.


Disney announced its $7.4 billion merger deal with Pixar on Jan. 24. As part of the deal, Pixar shareholders will receive 2.3 shares of Disney stock for every Pixar share they own. Disney said it will issue about 277.9 million additional shares for the merger. As a result, Pixar chairman Steve Jobs — also founder and chairman of Apple Computer Inc. — will become the largest individual shareholder of Disney stock, with about a 7% stake. Jobs will also become a member of Disney’s board of directors.

As a non-executive member of Disney’s board of directors, Jobs will be able to take advantage of a few perks. In addition to the stock-option grants (about 6,000 shares annually), a $65,000 annual retainer, $10,000 for any board committee he serves on and $15,000 for any committee he chairs, Jobs also gets reimbursed for the use of any Disney products, attendance at Disney entertainment offerings and visits to properties up to $15,000 for each calendar year, according to the proxy.

Pixar shareholders are scheduled to vote on the merger agreement in a special meeting in San Francisco on May 5. The deal is expected to close sometime this summer.

According to the proxy statement, Iger set the wheels in motion for the merger in a meeting with Disney directors on Oct. 2 and Oct. 3, just days after he became CEO.

Pixar started its relationship with Disney in 1986, with the two originally teaming up on several technical projects. That relationship expanded to developing, producing and distributing Toy Story, one of the first computer-animated films in 1991, and further grew into a co-production agreement in 1997 on a slate of five feature animated projects. Those five films turned out to be A Bug’s Life, Monsters Inc., Finding Nemo, The Incredibles and the soon-to-be-released Cars. The first four movies had a combined worldwide box office of $2.4 billion.


That relationship began to break down in 2004, when Pixar said it would seek another distributor for its films, mainly because of a falling out between Jobs and Eisner.

While Pixar did hold discussions with several major movie studios — discussions which never left the exploratory stage, according to the proxy — Disney resumed discussions with Pixar in June 2005.

At the Oct. 2-3 regularly scheduled meeting, Iger and other Disney executives stressed the importance of the animation business.

“At that meeting, Mr. Iger updated the Disney board on the status of discussions with Pixar and suggested that an acquisition transaction with Pixar was among the options that should be considered,” according to the proxy statement.

About 10 days later, on Oct. 12, Iger contacted Jobs about the possibility of a merger. What followed was a flurry of meetings between Iger, Jobs and other members of Pixar’s board of directors over the next several weeks. In a two-day meeting on Nov. 30 and Dec. 1, Iger and his team updated the board on discussions with Pixar since the October. board meeting and gave Iger the green light to pursue a deal.

On Dec. 2, Iger again met with Jobs, Pixar president Edwin Catmull and Pixar board members Lawrence Levy and Larry Sonsini to discuss “the management and operation of the companies’ combined feature animation businesses, roles that specific officers would play in the event of a transaction; and the importance of preserving and extending Pixar’s processes and culture in the feature animation business if a transaction occurred,” according to the proxy. “The parties also discussed valuation concepts and assumptions and the form of consideration that would be paid in a transaction.”

The discussions involving the roles of specific officers most likely centered on two key Pixar employees, Catmull and John Lasseter. Catmull, who Jobs said at the press conference announcing the deal had the idea for making the first computer-animated feature when he was heading up the computer room at Lucasfilm Ltd., will become president of animation after the deal closes. Jobs bought the animation division of Lucasfilm in 1986 to create Pixar.

Lasseter, who will be chief creative officer after the deal closes, will also be in charge of developing theme park rides around Disney and Pixar characters and movies.


Perhaps most interesting in the proxy is the speed at which a deal was done — four months from initial contact to acceptance — and what appears to be a relative lack of haggling over price.

About two weeks after Pixar’s board authorized Jobs, Catmull and Sonsini to continue discussions with Disney on Dec. 9, the two parties entered into a non-disclosure agreement to look at each others operations in more detail on Dec. 23.

Four days later, on Dec. 27, Disney presented a term sheet to Pixar. During the week of Jan. 17, Jobs and Iger met to discuss valuations and on Jan. 21 — a Saturday — they agreed that they would be prepared to recommend to their respective boards an exchange ratio of 2.3 Disney shares for every Pixar share. That price was accepted by Pixar’s board on Jan. 24.