Acquired
01:59:05 · David Rosenthal, Ben Gilbert
[01:59:05] S1: So in total, between the $3,000,000 for the campus and then these three movies that they all have in production, which collectively cost about $5,000,000 in so called negative cost before they get released, so before they earn a dollar of revenue. By early nineteen forty, Disney's, yeah, in this new campus had set up for this next phase of the company, but they're $8,000,000 in the hole. So Bank of America had loaned them another 4 and a half [01:59:33] S0: million dollars. They just keep going to Bank of America over and over again, just remortgaging the company. [01:59:40] S1: And then the hope was that Pinocchio, the first of the new films to come out, would be a hit and earn profits quickly. Unfortunately, World War two had started in Europe by early nineteen forty when Pinocchio gets released. So international box office is basically zero, and Pinocchio ends up losing money, like a lot of money, over $1,000,000 in losses on Pinocchio alone. [02:00:04] S0: Yeah. In a scale economies business, if you lose out on potential eyeballs and potential revenue, but your fixed costs stay the same, that's super, super bad news. Mean, I you you there's no ability to retroactively scale back how ambitious you're being with investing in a film. You know? You've already spent all the money to create it, and now you find out that you can't distribute it to half the world's screens. [02:00:29] S1: Half of your audience? [02:00:29] S0: Yeah. Yeah. Not good.
02:00:29 · Ben Gilbert, David Rosenthal
[02:00:29] S0: Yeah. Yeah. Not good. [02:00:30] S1: Yeah. Not to mention the impact on all the rest of the flywheel businesses. Like, not a lot of Pinocchio merch getting sold in Europe in, summer of nineteen forty. No. So after Pinocchio is a flop, Walt and Roy decide they basically only have one recourse at this point because Bank of America is not gonna loan them any more money. They need to sell equity in the company for the first time. So in April 1940, Disney retains investment bankers and sells 3,875,000 of convertible preferred stock with a 6% dividend, which technically is Disney's IPO. [02:01:15] S0: Is it technically? It doesn't go on a stock exchange. It's just over the counter. It's a public offering, I guess, but it's a pretty small group of the public. [02:01:23] S1: Exactly. Exactly. It is a non exchange traded public offering. [02:01:28] S0: And it's got this 6% cumulative dividend Yes. Attached to it. So the expectation when you're investing is this company is gonna pay me 6% of my investment back every year. Yep. So it's it's actually a pretty sweet deal for the investors. They sell 30% of the company to do this, to raise that. It's funny. You said 3.875. A little bit of that went to the bankers. There's some transaction fees. So they only raise about 3 and a half million dollars directly to their balance sheet, but they give up 30% of the company to do that, and it comes with that 6% cumulative dividend to those shareholders.
02:01:28 · Ben Gilbert, David Rosenthal
[02:01:28] S0: And it's got this 6% cumulative dividend Yes. Attached to it. So the expectation when you're investing is this company is gonna pay me 6% of my investment back every year. Yep. So it's it's actually a pretty sweet deal for the investors. They sell 30% of the company to do this, to raise that. It's funny. You said 3.875. A little bit of that went to the bankers. There's some transaction fees. So they only raise about 3 and a half million dollars directly to their balance sheet, but they give up 30% of the company to do that, and it comes with that 6% cumulative dividend to those shareholders. [02:02:04] S1: Wow. So this means they're flying even closer to the sun than I realized because they've got the $8,000,000 in investments that they need to fund, and they have 4 and a half million from Bank of America. And then if they're only getting 3 and a half million in proceeds from the IPO, that's exactly $8,000,000. [02:02:23] S0: They are shaving off every piece of their current self and future cash flows to rebet the farm. Yep. That is the the way to think about this.
02:02:23 · Ben Gilbert, David Rosenthal
[02:02:23] S0: They are shaving off every piece of their current self and future cash flows to rebet the farm. Yep. That is the the way to think about this. [02:02:33] S1: So that summer in 1940, Walt has a rather ominous get together with Henry Ford of the Ford Motor Company. Just sort of as, like, a friendly meeting of these two American business titans. And while they're together, Walt mentions to Henry about, the IPO that they just did. And reportedly, Ford tells him, Walt, if you sold any of it, you should have sold all of it. Ominous. Ominous. A real board of directors gets established for the first time as part of this, and the preferred get a director on the board. So an outside voice in the company who certainly is not gonna share Walt's vision here. So by the end of the year in 1940, despite the capital raise from the stock offering, Disney's in a cash crunch. Walt, before the IPO, had even set up a kind of, like, proto employee ownership system where they set aside 20% of the company's equity and used that stake's profit distribution to fund an annual employee bonus pool. They have to eliminate that, like, months basically after Walt institutes it. And what they end up doing as a result is they raise salaries of the few top animators in the firm, and then they keep the same or they lower salaries for everybody else in the Burbank lot. And this causes huge resentment and unrest in the animation workforce.
02:04:05 · Ben Gilbert, David Rosenthal
[02:04:05] S0: Yeah. I I mean, I bet that's gonna make no one happy, but this is the, like, literal trade off. This is we spent a bunch of money on Pinocchio. Yep. We didn't have Europe, so we lost a bunch of money on that. We still have big ambitions. And, like, this is Walt's implicit choice here with going out and raising all this debt, raising all this equity, betting the farm again. Yep. [02:04:28] S1: This is the downside of Walt's, always go for broke and shoot the works philosophy. Yep. And it leads probably to the darkest moment of Walt's life. [02:04:39] S0: That would change his relationship with the company forever. [02:04:42] S1: Forever. And irreparably, his relationship with Disney Animation, the strike. So on 05/29/1941, the Screen Cartoonist Guild, which is a union that had unionized every other major animation studio in Hollywood and New York over the couple years leading up to this. [02:05:03] S0: Which there were several of Yep. At this point in time. Yep. We've been sort of very Disney centric, but there is an industry around this. [02:05:09] S1: Yep. Decides finally to target Disney employees. Now there's a reason why the Screen Cartoonist Guild had stayed away from Disney despite it obviously being the leader in animation up until this point, which is, I think, Walt's utopian dream more or less was true or at least true enough. Like, he established the bonus pool for animation. He constructed this campus, everything you were talking about earlier, Ben. But here with the cash crunch, that all comes crashing down.
02:05:09 · David Rosenthal, Ben Gilbert
[02:05:09] S1: Yep. Decides finally to target Disney employees. Now there's a reason why the Screen Cartoonist Guild had stayed away from Disney despite it obviously being the leader in animation up until this point, which is, I think, Walt's utopian dream more or less was true or at least true enough. Like, he established the bonus pool for animation. He constructed this campus, everything you were talking about earlier, Ben. But here with the cash crunch, that all comes crashing down. [02:05:44] S0: Yeah. There's a great excerpt from the book, the animated man by Michael Barrier. In the spring of nineteen forty one, under pressure from the Bank of America and holders of preferred stock, Walt Disney Productions agreed to scale back its production cost to about $15,000 a week. According to Walt Disney himself, that meant he had to hold the negative cost of new features to about $700,000 or one third the cost of Pinocchio or Fantasia, which was also in development at the time. Since labor costs made up 85 to 90% of Disney's total costs, implementing such severe economies would mean laying off more than half the staff. Oof. So you've got cost reduction in some of the people sticking around, and you've got big layoffs because Pinocchio didn't pay back.