Disney's Integration of Pixar

Let's hope it goes better than this. . .

Perfection - Enemy of the Good

So - no sooner linked than picked upon, Lorne. I wouldn't be quite so charitable toward Steve Jobs' carrot juice tantrum. One person's quest for perfection is another person's nit-picking idiosyncrasy. Wouldn't orange juice have been OK? The behavior described veers perilously close to that of prima donna performers who must have all the brown M&M's removed from the bowl in the green room, and other such nonsense.

There are cases for perfection, and Jobs has certainly harnessed it to great advantage in molding Apple's design aesthetic. There's also no question that it's better to delay product launches to get them right than risk negative customer experiences by launching too early.

On the other hand, and particularly in fast-moving industries and situations, the quest for perfection can doom you with delay. Wait to launch your product until it is absolutely perfect, and you may find a competitor has already seized the advantage and market share with an inferior - but good enough - product. Try to draft the perfect contract and your customers will get frustrated and go elsewhere. And in the world of corp dev, try to negotiate the perfect deal and you won't get it done. The ideal of perfection must be balanced against considerations of time, cost and impact on other elements of the project. Getting it "as right as possible" within these contraints is key.

Corp Dev Confessions

I welcome another (perhaps the ONLY other) corp dev blog - Lorne Groe's "Confessions of a Corporate Dealmaker." I'm looking forward to comparing notes with Lorne on his experience in technology dealmaking.

No Deal Fever

Good to see that J&J didn't succumb to "deal fever" and chase the $27B proposal made by BSX. Still, as I posted last week, J&J could have had Guidant for several billion dollars less had they not overestimated their leverage in exercising the MAC clause. Perversely, Guidant's problems post-signing - which precipiated J&J exercise of the MAC clause - ended up creating $2B in shareholder value. It's a strange world.

Disney - Pixar Official

I posted last week about the rumored Disney - Pixar deal, and now it's official.
The more I think about this deal, the more sense it makes to me. No, Pixar isn't getting a big premium over where they were trading before the deal rumors started to fly. But Pixar has been hitting on all cylinders, and in the film business they are one flop away from losing 20% of their market cap. With this deal, Pixar shareholders get to lock their value in with very little risk of Disney (a moribund stock for years) taking a similar dive. Better yet, if the mouse follows through on preserving Pixar's independence and gives Ed Catmull real authority over the animation business, Disney could put on the kind of growth over the next few years that would only come at great risk for a standalone Pixar.

Worst Day of the Year

Apparently, January 24 is the single worst day of the year. This was particularly amusing to read this morning in Seattle, where the sun is shining on the Olympic range as we enjoy our first sunny day in months.

Disney - Pixar

I'm scratching my head a bit over the rumored Disney-Pixar tie-up, particularly since the merger price is right around Pixar's current value. Disney hasn't had a decent animated feature in years, while Pixar churns out smash after smash. You'd think Jobs would have all the leverage to get a premium deal. On the other hand, Pixar will need a new distro deal by mid-year, and the idea of Disney having the right to make muddled sequels to Toy Story and the like has got to be deeply grating to the creative types at Pixar.

Pixar's shares are near an all-time high, so perhaps Steve Jobs figures this is as good a time as any to cement the value, get Pixar control over sequels, and influence Disney's direction (and faster growth for former Pixar shareholders) via a BOD seat.

Another Overused Term

"Walled Garden." Sounds great - peaceful, meditative, hell, maybe even romantic. In reality it's just a way to limit what you get to access on-line. My good friend Mike Naughton (no link, but he says he'll be blogging real soon. . .) offered this gem as a replacement: "Gulag Exercise Yard." It's just as visual as "walled garden", and a lot more accurate.

Save it for Baseball

I'm in San Jose for the Wireless Communication Association symposium - look here for the buzz about Clearwire coming out of the show. It seems to be a very well-attended event this year, but walking the exhibition floor last night I immediately found an early contender for over-used cliche of the year: "Triple Play." Brilliant and rare in baseball, here at WCA the phrase seems to be spilling from everyone's lips, and was plastered on at least a half-dozen exhibition booths. Sure, it's fine to have shorthand for providing three services (voice, data, video) to a customer, but this is a hackneyed sports metaphor dressed up as an exciting new product ("triple play services!") that's nothing more than good old bundling.

Of course, I'm sure I'll find myself saying it in the months to come . . .

Good to Be Guidant - Redux

After J&J's last offer, I said I would be disappointed if BSX didn't pull out the stops and make its best offer. It looks like they've done that, coming in WAY over the top with a deal valued at over $27B. That's something like a $3B increase over J&J's last offer, and for J&J to be competitive here they will need to go over the $25B they originally offered oh so long ago. J&J won't need to go to $27B, since they've still got the advantages of time and certainty of closing, and because the market is likely to take BSX stock down pretty viciously for fear of what this merger will do to the company's credit ratings. Still, it will take more than $25B for J&J to win Guidant, meaning the whole exercise of J&J declaring the MAC clause was a colossal strategic blunder, costing J&J time, money and quite possibly the opportunity to make this acquisition. Sometimes you've got to leave a few dollars on the table in order to make sure you get what you're after.

Setting Dates

I spent some time today dealing with an annoying and quite avoidable contract issue. Virtually all contracts have important dates - the date the agreement begins, the date it terminates or renews, the outside date upon which a merger can be terminated, the date puts, calls, shotgun rights or other exit mechanisms kick in – you name it. Far too often, these dates are defined based on future occurrences (e.g., “the contact term shall begin once X happens”), other agreements (“the contract term shall begin once Agreement Y is executed”), or, the bane of my existence today, both (“the contract term shall begin on the later of X happening or Agreement Y being executed”).

In the months following an agreement being entered into, terms like this will typically not cause much consternation. Everything you need is at hand. But let’s say you’re dealing with a partnership agreement, distribution contract, long-term lease or the like. Let’s say the original agreement was signed 10-15 years ago, it’s been amended four times and assigned twice. Maybe you’ve picked the agreement up in an acquisition. Now, you’ve got to track down all of those ancillary events and agreements just to determine how the contract is supposed to run, and perhaps even whether it is still in effect. Besides the annoyance, the need to track and follow this trail of dates and agreements greatly increases the chances that someone will inadvertently blow a date under the agreement. Sure, maybe it will be the other side, but do you really feel that confident about your own contract management tools?

I think that, wherever possible, these dates should be clearly set and determined within the contract itself. Yes, there are times when that doesn’t work. But I think that these undefined dates are usually more a product of laziness than inability to reach agreement. In my experience, mutually-acceptable dates can usually be set very easily, and you’re doing future handlers of your contracts a great service by setting them up this way.

Going to the Well . . .

I continue to be highly amused by the to-and-fro in the struggle for Guidant. Not surprisingly, J&J raised its offer last night, and Guidant promptly accepted. I think this is the fourth time the Guidant BOD has approved a merger partner - talk about your rapid lead changes! J&J's new proposal is basically the same economically as BSX's latest, but J&J has the timing and certainty of closing advantage. Those factors are very important to Guidant management - this isn't a matter of taking whichever offer is a quarter higher.

I'd be a littled surprised (and disappointed) if BSX took its ball and went home here. I'm sure they feel a bit worked by Guidant right about now, but with the Guidant shareholder vote in two weeks, they should pull out the stops and go as far as they can. They'll either get their prize or at least know they didn't let J&J walk away with Guidant for anything less than a premium price.

Good to be Guidant

Guidant has got to be feeling a little bit of sweet redemption these days. After months of being slapped around by J&J, including the indignity of accepting a reduced purchase price, Guidant has found itself in that holiest of spots for a seller - a bidding war.

BSX raised its bid this morning by $1 (from $72 to $73 per share). While that's less than a 1.5% increase, word is that BSX has included in its proposal a couple of terms designed to make its offer roughly equal J&J's in terms of certainty and timing of close. Essentially, BSX will do whatever divestitures necessary to get antitrust approval, and will add interest to the deal starting on the assumed date of a J&J close. With that kind of equalization, the folks at Guidant are liking the idea of finally getting the chance to smack J&J down.

While this likely isn't the last move we'll see, one thing is sure - J&J has got to be sorely regretting its decision to exercise the MAC clause and not rush to close the original deal.

J&J - Guidant

I last posted about J&J - Guidant in mid-December, when Boston Scientific came in with a higher offer of around $25B. Now J&J has come up to $23.2B, and Guidant has accepted J&J's revised offer.

Why would Guidant take an offer that's $1.8B less?

First of all, it might not really be $1.8B less. If Guidant goes with BSX, there will be a breakup fee payable to J&J somewhere in the neighborhood of $700M. I haven't seen anything that indicates the BSX offer is net of that fee. Secondly, a deal with J&J can get closed months faster, which increases the NPV of the J&J deal relative to BSX. Finally - and this will be very important to Guidant given their experience the first time around - the J&J deal offers greater certainty of closing. You can be sure there will be virtually no chance of J&J exercising the MAC this time around, and J&J's size relative to BSX (nearly 10X bigger) reduces the chance of the acquiror getting buffetted by market forces before closing occurs.

Alito Hearings

In the years since I’ve moved to corporate development, I can’t say that I’ve ever really missed being a lawyer. That said, I can’t shake some of the things that interested (or annoyed) me about being a lawyer. With my recent missives about over-lawyered term sheets, and having caught part of the Alito hearings while working out today, I’m just going to plunge into a week of lawyer-related posts.

First of all, Alito – watching his hearing today, the thought I kept coming back to was: “What the hell was Bush thinking in appointing Harriet Miers?” Look, I’m a Democrat, but I can’t find anything wrong with Alito. He’s a lawyer’s lawyer, and he comes off as being unstintingly reasonable, unflappable and very, very smart. He seems to be committed to following the law (including the principle of stare decisis), and not likely to be a conservative activist in the mold of Thomas or Scalia. The best the Dems can seem to come up with against the guy is a mistake he made in not recusing himself from a case and a couple of strategy memos he wrote while serving as a government staff attorney. I think the more senior and cagy Dems on the Judiciary Committee decided to give Alito a pass, realizing that they can’t stop his nomination and it would be self-defeating to try. I watched a good chunk of Dianne Feinstein’s questions, and they were awfully soft.

An aside: I don’t usually watch TV news, but I watched the Alito hearing on Fox news. I’ve heard, of course, how blatant Fox is with its conservative bias, and I was not disappointed – throughout the hearing a box would appear explaining legal terms used by Alito or the Senators. At one point, Fox offered this definition of judicial activism: “A judge who finds laws not written in the Constitution.” This definition, of course, only includes activism of the liberal kind. This was made doubly amusing by the fact that at the same time as the box appeared both Alito and his questioner, Republican Senator Mike DeWine, made frequent use of the more cogent definition of judicial activism – “a judge who substitutes his own opinions for that of the law.”

Managing Lawyers

I’ve spent a good part of my career as a lawyer, many of my good friends are lawyers, and I have great respect for the work lawyers do. There’s no question that proactive, thoughtful legal advice adds value to any enterprise or deal. Very effective, strategic legal counsel can even be a competitive advantage. However, to expand on my earlier post regarding not over-lawyering term sheets – it’s equally important to manage your lawyers once definitive documents are being negotiated.

If you are fortunate, your lawyers will understand your business, your objectives, your timelines and your risk tolerance. They will work smoothly with the other side’s lawyers and help you bring the deal in on time and on acceptable terms. If you are unfortunate, your lawyers will have no business judgment, obstinate manners and lack any ability to weigh risks and opportunities. They will blow your deal up over meaningless terms, leaving you to try to pick up the pieces.

It can be tempting for non-lawyer deal guys to hand great chunks of the work on the definitive agreements over to the lawyers to work out. However, until and unless you have confidence in how your lawyers work, you’ll want to stay involved in all of those discussions, even if it just means a lot of listening. It’s equally important to make sure you have an understanding with your lawyers about who is in charge on your deals. You are. In any deal, there will be a number of points where you will need to overrule your lawyer’s advice or the position they are pressing for. This makes sense, right? The lawyer SHOULD be pressing more aggressively, and the deal guy should be doing the big picture balancing of the overall deal. Unfortunately (and I’ve run into this across the table far too often), the deal guy will shrug and defer to the attorney on stuff they should be moderating. So the deal bogs down – or derails – while you try to sort it out. While this is less of a problem in smaller companies or when using outside counsel, it can be a major problem in dealing with in-house M&A counsel at larger companies.

Term Sheets - Over-Lawyering

Expanding on the point made in Brad Feld’s latest Term Sheet post re over-lawyering – a term sheet, useful tool as it is, is really nothing more than a handy way to keep track of the key deal terms the business people have agreed upon (in principle). It’s not a binding agreement; it’s a way to determine if you can even get to a binding agreement, and once there, a tool to facilitate the negotiation process.

As such, there’s no need to draft it with legal precision - that can wait for the definitive agreements. Sure, there are cases where you need legal input on key deal terms that are inherently "legal." Some deals will have key terms involving specific IP rights, or apportionment of environmental liabilities, or some other nasty thing that you'll want your attorney to review/draft. Other than that, if you're going to insist on having attorneys review or draft the whole thing, you might as well dispense with it and go straight to the definitives. I have been involved with plenty of deals where no term sheets were exchanged, and many where the “term sheet”, such as it was, consisted of nothing more than an exchange of e-mail. While it's true (as Brad points out) that more detailed term sheets are generally better, at some point the additional detail is outweighed by the cost in time spent at the term sheet phase.