Pixar, Disney to End Partnership

Feb 2, 2004  •  Post A Comment

Wall Street responded with muted disappointment at the surprise announcement late last week that ABC parent Walt Disney Co. and animation company Pixar Animation Studios, the team behind the hit films “Toy Story” and “Finding Nemo,” will go their separate ways in 2006 after a 12-year marriage that has generated billions in box-office receipts.
Disney shares opened Friday down nearly 3 percent but made up some lost ground later in the day and closed Friday down 2 percent to $23.95 a share in heavy trading as the initial shock of the partnership’s end began to wear off. Pixar shares, meanwhile, closed up 3.7 percent to $66.69 a share in heavy trading as investors anticipated that company’s quick marriage to another movie studio.
For Disney, analysts were generally in agreement that although the studio will likely feel some pain as a result of its divorce from Pixar, the negative impact, if there is one, won’t be seen until well after the partnership officially dissolves in two years. In the short term, Disney and Pixar have two movies slated to be released: “The Incredibles” later this year and “Cars” in 2005. Further out, Disney also retains rights to greenlight sequels and spinoffs to films produced under the existing Disney-Pixar pact.
“This came down after a 10-month discussion between [Disney Chairman and CEO Michael] Eisner and [Pixar CEO Steve] Jobs in which, if you put them in a room together, the chances of them coming out unscathed was impossible,” said Dennis McAlpine, principal in media analyst firm McAlpine Associates in Scarsdale, N.Y. “The deal Jobs was offering, I wouldn’t have taken if I was Disney. I couldn’t afford to.”
Indeed, given that Mr. Jobs had been angling for partnership terms that shifted more money generated by Disney-Pixar films to the animation house, many analysts said Disney and Mr. Eisner faced a lose-lose situation. Since releasing its first film, “Toy Story,” in 1995, the alliance between the two companies has generated more than $2.5 billion in worldwide box-office sales.
The two companies’ current arrangement has Disney distributing all of Pixar’s films in exchange for 12.5 percent of box-office sales. The companies divide the profits, and Disney retains the rights to the Pixar films included in the pact.
“Disney may have lost considerably more had it agreed to Pixar’s request, i.e., give up control to copyrights and sequels while agreeing to revised terms on the next two films,” Merrill Lynch analyst Jessica Reif Cohen said in a research note.
Disney CFO Tom Skaggs said as much in a statement issued last week, pointing out that had Disney signed on to Mr. Jobs’ offer, Disney would have forfeited hundreds of millions of dollars to which it is entitled under the current agreement.
Despite a general consensus that the termination of the Pixar-Disney marriage will have little impact on Disney’s financials, the news of the breakup capped a bad week for Mr. Eisner.
On Tuesday, former Disney board member Roy Disney issued a letter to shareholders urging them not to re-elect Mr. Eisner and three other directors to the Disney board at the company’s March 3 annual shareholders meeting.
The letter was the latest volley in an ongoing battle over the direction of the company that has pitched Mr. Disney and fellow former board member Stanley Gold against Mr. Eisner and several board members. Both Mr. Disney and Mr. Gold resigned in November to protest Mr. Eisner’s leadership and the direction of the company.
“We are seeking a NO vote on Michael Eisner and also a NO vote on George Mitchell, Judith Estrin and John Bryson because they symbolize, respectively, the poor management, poor governance, poor compensation practices and a lack of board independence that are impeding the development of long-term shareholder value at The Walt Disney Co.,” Mr. Disney said in his letter.
Later in the week, Mr. Disney also weighed in on the collapse of the Pixar talks. “Michael Eisner’s inability to manage and nurture crucial creative relationships, like the one Disney had with Pixar, is one of the main reasons we have maintained that we did not believe Disney’s earnings were sustainable,” Mr. Disney in a statement issued Thursday.
Exec Salaries Grow
Those comments came as Disney reported in its annual proxy statement that Mr. Eisner took home 20 percent more in fiscal year 2003 than he did the previous year, with his stock-based bonus going up by more than $1 million. His No. 2, President and Chief Operating Officer Robert Iger, saw his pay package grow by 22 percent.
According to a proxy statement filed last Tuesday with the Securities and Exchange Commission, Mr. Eisner’s total remuneration for the 12 months ended Sept. 30, 2003, was more than $7.3 million, compared with a year-ago figure of nearly $6.1 million. Though his base salary of $1 million was unchanged, Mr. Eisner saw his annual bonus-in the form of stock-swell to $6.25 million from a year-earlier figure of $5 million. The executive did not receive a cash bonus.
Though his overall take-home grew, Mr. Eisner saw a decline in so-called “other compensation,” which in Mr. Eisner’s case encompasses use of company aircraft and a security detail for both business and nonbusiness travel. In fiscal year 2003, other compensation fell to nearly $63,700 from a year-earlier level of almost $88,200. (The security detail and use of company aircraft are mandated by the Disney board, the company said in the proxy.)
Meanwhile, Mr. Iger’s total remuneration reached nearly $6.9 million in fiscal year 2003, up 22 percent from a year-earlier $5.7 million. His base salary grew to nearly $1.4 million from a year-earlier figure of $1 million, and he received a $4 million cash bonus in addition to $1 million worth of stock. He also received $500,000 in connection with deferred salary for fiscal years 2003, 2002 and 2001 as set forth in his employment contract.