The Strategic Decision: Cash Vs. Stock When Selling Your Business

I sincerely hope everyone reading this article will someday find themselves in the position to sell a company for a life-changing amount of money. If you do find yourself in that position, there's a decent chance you'll be debating whether you should sell for cash or stock. It's a tough call. If you're selling to a publicly traded company with a reputable track record, accepting stock might not be a bad decision. However, even selling to a publicly traded company with a stellar performance record can be risky. Take Mark Cuban for instance. When he sold Broadcast.com to Yahoo in 1999, the deal was for $5.7 billion in Yahoo stock—not a dollar in cash. On the day the deal closed, Yahoo stock was trading at $163 per share, but about a year and a half later, a single share traded for just $8. The reason Mark Cuban is a multi-billionaire today is that he dumped 100% of his shares the very first day his six-month lock-up expired. Mark was both lucky and smart, while a thousand other dot-com entrepreneurs weren't so fortunate or savvy.

Long story short, no one will ever fault you for taking cash. Cash, as they say, is king. However, there is one other option to consider. To hedge your bets, you could request half cash, half stock. That's what George Lucas did when he sold his company to Disney, and boy was that a good call in retrospect!

How Did George Lucas Own 100% Of Star Wars In The First Place?

[***If you've read our article "How One Brilliant Decision In 1973 Made George Lucas A Multi-Billionaire Today", the following paragraph may be old news. But it's worth explaining some history before we get into the Disney deal.***]

George Lucas wasn't exactly a film industry titan back in the early 1970s. He was just 28 years old when he pitched a "western set in space" to 20th Century Fox executives. What eventually became "Star Wars" was only the third movie he would direct, following 1971's "THX 1138" and 1973's "American Graffiti."

Despite being relatively new to the industry, George had gained some clout. "American Graffiti" turned out to be one of the most profitable movies ever, earning $140 million off its $777,000 budget. However, he still couldn't convince 20th Century Fox executives that he needed $11 million—15 times his previous budget—for a unique space movie while retaining complete ownership of the franchise's intellectual property rights.

Fox executives wanted him to direct "American Graffiti 2" or another coming-of-age drama. But George was determined to pursue his vision of a space western. They were on board yet understandably nervous about the investment.

For context, $11 million in 1973 equates to about $65 million today. To alleviate Fox's fears, George made a proposal.

After the success of "American Graffiti," he was entitled to a salary of $500,000 for his next project, a 300% raise over the $150,000 from "Graffiti." Instead of accepting the higher salary, George suggested that Fox keep his salary at $150,000 in exchange for two seemingly minor requests:

• #1) That he retain all merchandising rights.
• #2) That he retain the rights to any sequels.

This deal seemed crazy at the time, but it was a fantastic arrangement for the studio. Fox had recently lost a fortune in merchandising with the failure of 1967's "Doctor Dolittle," so they weren't eager to get back into that world. Additionally, merchandise was not a significant revenue stream for studios back then. Regarding sequel rights, no executive believed the movie would make money the first time around, so those rights were considered worthless.

Thus, the deal was struck, and decades later, it would be regarded as one of the best deals in Hollywood history.

Pre-Disney "Star Wars" sequels would go on to generate $3.5 billion globally. "Star Wars" DVDs generated $4 billion, and toys and merchandise raked in an estimated $12 billion in revenue. Remarkably, 100% of profits from all these streams went directly to George Lucas.

Most importantly, without retaining the intellectual property rights, George wouldn't have owned anything and therefore wouldn't have had anything to sell to Disney decades later.

Selling Star Wars

On October 12, 2012, it was announced that George Lucas reached an agreement to sell all rights to the entire "Star Wars" franchise to Disney for $4 billion. As highlighted earlier, George opted for a half cash/half stock deal, specifically a 55% cash and 45% stock arrangement:

• $2.21 billion in cash
• 37,076,679 shares of Disney

At the time the deal closed, Disney shares were trading at $50, making the stock portion worth $1.85 billion. His 37 million shares represented roughly a 2.1% stake in the company, making him the second-largest individual shareholder behind Laurene Powell Jobs, Steve Jobs' widow. When Steve Jobs sold Pixar to Disney in 2006, he received 138 million shares, about 7% of the total outstanding shares. Laurene inherited this stake after Steve's death and has since sold off about half, but she remains the largest individual shareholder at around 4% of Disney.

Before the Disney sale was announced, George Lucas's net worth stood at $3.3 billion. After the deal, his estimated after-tax net worth jumped to $5.5 billion.

Interestingly, due to a tax loophole that was closing two months later, George saved around $100 million in taxes by finalizing the deal when he did. On January 1, 2013, the long-term capital gains tax rate increased from 15% to 20% as the business-friendly George W. Bush era tax cuts expired.

Disney Stock Performance

"Star Wars" wasn’t the only franchise that Disney acquired for $4 billion. In 2009, Disney also purchased Marvel Entertainment for the same price. However, at the time of that deal, several Marvel franchises had pre-existing agreements with other studios.

The 2012 release of "The Avengers" marked the first Marvel movie to be fully produced and distributed by Disney without another studio taking a cut. Since then, Disney has generated approximately $20 billion at the global box office from Marvel movies released after 2012.

Disney has also generated around $5 billion from post-Lucas "Star Wars" movies. On November 12, 2019, Disney entered the streaming wars with the launch of Disney+. Ten million people signed up on the first day. Just 16 months after launch, Disney confirmed it surpassed 100 million paying subscribers to the streaming service.

So, how has Disney stock performed over the last decade? As illustrated in the accompanying chart, Disney stock has experienced a remarkable rise, except for a few months in early 2020, when the pandemic caused significant market downturns.

Most recently, thanks to the announcement of reaching 100 million subscribers, Disney hit an all-time high of $203 per share, while it closed at $195 on the day this article was written.

George Lucas's Disney Stake Today

By all accounts, George Lucas has not sold a significant number of his Disney shares. In 2013, there were rumors that he sold 100% of his stake, but those reports were quickly debunked. What actually happened was that George filed a notice with the Securities Exchange Commission after transferring the shares to The George W. Lucas, Jr. Fourth Amended and Restated Living Trust. Some interpreted this as a signal of intent to liquidate, but a LucasFilm representative denied those rumors, confirming that George had no intention of selling his shares then or in the near future.

If George still owns his full stake, at $200 per share, his 37 million shares are worth:

$7.4 billion

It gets better! In years when Disney pays dividends, typically every year except 2020, as the owner of 37 million shares, George receives $32 million twice a year as a dividend payment. So, from 2013 to 2019, George likely received around $448 million in dividends.

When you put it all together, you can see why George's net worth now stands at an all-time high of $10 billion.

This is great news for humanity because George was one of the first billionaires to sign Bill Gates and Warren Buffet's Giving Pledge. He has confirmed that he intends to give his entire fortune to charity by the time he dies. So, we should all keep rooting for Disney stock!

One last point to