[Chapter 280: A Storm is Brewing]
Not long after the meeting with the presidents of the seven major film studios, Link received news that they were preparing to unite once again to target Guess Pictures, aiming to undermine their films through every aspect from production to promotion. The approach was aggressive.
Link called Greg Davis, the Chief Investment Officer at Vanguard Capital, and Paul Zummo, a senior partner at J.P. Morgan, to gather their insights about whether the entertainment capital would get involved in this latest move by the seven major studios.
Both men expressed uncertainty and suggested he consider a second round of financing sooner than later. They explained that as long as Wall Street capital held a significant portion of Guess Pictures, the two entities would be indistinguishable. They would essentially be one family, and the investment firms behind the seven major studios would no longer pursue Guess Pictures but treat him equally.
With this realization, Link understood the underlying motives. The apparent competition between the studios was merely a front; Wall Street could see that Guess Pictures was making substantial profits and was eager to share in the rewards. They didn't want Link, an outsider, to monopolize the profits.
Wall Street was using this maneuver to pressure Link into a second round of financing ahead of time.
Link then inquired about the current valuation of Guess Pictures according to Wall Street. As soon as they sensed he was willing to discuss, Greg and Paul's demeanor shifted to enthusiastic.
Greg informed Link that several investment firms on Wall Street had assessed Guess Pictures' value between $600 million and $800 million, making it the largest film company outside of the seven major studios in Hollywood. He added that Vanguard Capital was prepared to acquire shares in Guess Pictures at a valuation of $800 million if Link agreed to finance.
Paul proposed a similar promise from J.P. Morgan, also offering to buy at the same valuation, and asked when Link could initiate the second round of financing.
Link pressed both men on how much equity Wall Street would want from Guess Pictures for the financing. They indicated a preference for over 50%. If financing surpassed 50%, Wall Street would gain a dominant position on the board of Guess Pictures, allowing them to make decisions about the company.
After several rounds of financing, Link's shares would be diluted, reducing his influence over the company. Eventually, even if he remained the chairman, he would have to defer to the board's decisions for crucial matters. The situations of New Line Cinema and Miramax after being acquired underscored this point.
This was precisely Wall Street's goal: to gain control over all profitable enterprises and tighten their grip on Hollywood and beyond.
Contemplating all this, Link informed both men that Wall Street was undervaluing Guess Pictures and that he would not accept their offer. His counterproposal was $1.8 billion to $2 billion.
He argued that just last year, Guess Pictures was valued at under $300 million. In just one year, the value had multiplied several times. Even Wall Street's investment consulting firms recognized that the company's value had tripled, indicating its rapid growth and enormous investment potential.
Moreover, Guess Pictures had performed better this year than the seven major studios, with some valued in the tens billions but failing to compete with Guess Pictures at the box office. Guess Pictures had fast earnings, low costs, and minimal investment risks, making it a surefire investment.
Wall Street should be considering Guess Pictures at the same level as the seven major studios. Based on these two points, his $1.8 billion to $2 billion valuation was a conservative estimate. If the second round of financing began next year, he expected the valuation to no less than $2.5 billion.
Link urged them to act quickly.
Upon hearing his minimum of $1.8 billion, Greg and Paul couldn't help but exclaim, "My God, are you kidding?" and "This is insane!"
They had anticipated Link would be dissatisfied with the $600 million to $800 million estimate, knowing how well Guess Pictures had performed that year.
With nine films released, Guess Pictures had over $800 million in North American box office earnings, with worldwide earnings expected to exceed $1.8 billion.
When accounting for box office splits from Pulp Fiction, along with video sales, home video rights, advertising sponsors, and other licensing income, this year's revenue for Guess Pictures was projected to exceed $2 billion, with net income expected to be no less than $600 million after deducting production and promotional costs.
Given all this, an $800 million valuation was indeed too low. Their psychological price point was around $1 billion, expecting Link to quote something near that figure. However, Link's aspirations were higher than they anticipated.
He disregarded Wall Street's assessment and directly proposed a price three times the initial valuation.
Greg explained that his offer was too high and they couldn't accept it. They pointed out that Guess Pictures was still a relatively young company; apart from the production and distribution companies, Marvel Entertainment, it lacked substantial other assets.
Unlike the seven major studios, which had vast resources including film lots, extensive film libraries, and theme parks, Guess Pictures couldn't be equated in a traditional investment sense.
Investing in such a company carried too great a risk for Wall Street.
Paul encouraged Link to reconsider, suggesting he should lower his expectation slightly. The last time the seven major studios had neglected Guess Pictures was precisely because it hadn't captured a significant share of the box office, making them unworthy of attention.
Now, however, Guess Pictures' rise had severely impacted the profits of the backers of the major studios. They were unlikely to sit back and allow Guess Pictures to continue its ascent and snatch away their profits.
The seven major studios and their powerful media groups would be poised to strike against Guess Pictures.
It would be challenging for Guess Pictures to continue its unrestricted profitability as they had over the past two years. If the capital backing the seven studios combined to take action against Guess Pictures, its growth would certainly face setbacks and its valuation would tumble.
At that point, they wouldn't be able to find anyone willing to invest, let alone at $600 million; it could drop to $300 million.
Paul urged Link to consider financing after Guess Pictures had a couple of blockbuster hits, taking advantage of the market's high interest. This way, they could secure more capital while also strategically relinquishing a portion of profits to Wall Street, thus fostering reconciliation with the major studios.
It was a win-win situation. If Link refused to do this, he might miss out on a golden opportunity to avert risks.
After further consideration, Link agreed to lower his offer by $200 million, proposing a $1.6 billion to $1.8 billion valuation for 30% of the company for the second round of financing. The more they bought, the cheaper the price would be.
By the third round of financing, he would be prepared to give up over 50% of his shares. Currently, he and Glimmer Capital together owned 73% of Guess Pictures' shares, so offering 30% for financing would not jeopardize his control of the company.
If successful, he would have several hundred million in additional funds on hand.
Upon hearing Link's willingness to compromise, Greg and Paul agreed to relay the information to their respective firms, allowing them to decide whether to invest.
...
Link also took to the media, announcing that Guess Pictures would initiate its second round of financing at a valuation of $1.6 billion, expecting to finance 30% of the company.
After the news broke, prominent publications like the Wall Street Journal and Business Weekly reported that the seven major Hollywood studios were planning a united front to counter the rapid rise of the eighth major studio, Guess Pictures.
In the face of pressure from industry giants, founder Link was forced to advance his second round of financing to strengthen the company's market competitiveness and financial reserves. However, several Wall Street investment firms assessed the current market valuation of Guess Pictures at only $800 million, far below Link's $1.6 billion financing target.
Industry insiders speculated that Link seemed unwilling to concede to Wall Street or give up profits, which led him to propose such a high price. If he did not lower his proposal, the second round of financing was likely to fail.
...
"$1.6 billion? Is this guy insane? A company that's barely three years old dares to ask for $1.6 billion? I wouldn't dare suggest such a high price even after twenty years at CAA."
Michael Ovitz frowned at the news in the paper. At its peak, CAA was valued around $1 billion, and now it was closer to $600 million, which was comparable to Wall Street's valuation of Guess Pictures. Yet, Link had the audacity to ask for $1.6 billion.
This implied that Link had achieved in three years what Ovitz had taken two decades to build.
Ovitz scoffed at the notion.
"Sure, that's a high number, but it's also true that Guess Pictures can make money," said Ron Meyer.
Ovitz didn't refute this, letting out a subdued snort. "Link underestimates the complexities of capital operations. Wall Street's objective isn't just to put pressure on Guess Pictures to maximize profits; Link seems to think he can outsmart the investment companies and take a big slice for himself. I'd bet that this round of financing will certainly fail."
Ron nodded in agreement, acknowledging that Wall Street wanted to share in the profits while Link attempted to seize a bigger share of the pie from them.
Wall Street was powerful and greedy and wouldn't allow him to succeed. If no capital was willing to take the plunge, the major studios could freely suppress Guess Pictures.
"Link will pay the price for his greed; this is also what he gets for crossing me," Ovitz smugly smiled.
*****
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