The Walt Disney Company And Pixar Inc Media Essay

The animation industry had changed over the years and by 2005 the new CG technology was rapidly supplanting hand drawn animation. The movies made by using this new technology gave flexibility to the animators and films were being made faster and at a lower cost. Pixar had its own proprietary CG technology and this gave it a competitive advantage over its rivals. Disney on the other hand struggled to get a grasp on CG technology and had to rely on revenue and characters produced by its partner Pixar.

Multiple revenue streams:

While box office revenues from the theatrical release were a measure of a movie’s success, financial success actually came from the revenue streams that came from the movie. By 2005 such sources included home video sales, video on demand on cable channels, television showings and merchandise sales. Film libraries became valuable assets for these studios. Sequels to successful movies also became an important source of revenue. Realising this Pixar wanted Disney to return rights of two yet to be released movies. Pixar also wanted Disney to give up give up its co-ownership of past films.

Popularity of animated films and its effect on Disney-Pixar relations:

Buoyed by the success of its full length animation films Pixar wanted to curtail Disney’s role to that of just a distributor and pay only the distribution fee to Disney. This was the bone of contention during contract renegotiation and disagreement over this point led to Pixar walking away from the partnership in 2004.

Increased competition in CG space:

Because animated films generated the highest returns and barriers to entry decreased as access to technology grew, competition in CG space became fierce. Many newer and smaller players entered the fray with an ambition to become the next Pixar. Pixar also had to compete with some big studios like DreamWorks, Warner Bros, Fox, Sony, and, to some extent Disney.

Using the relevant strategic framework, explain in detail, the points in favour and against the Pixar’s acquisition by Disney as of November 2005.

We use the better-off test to analyse the various points in favour of and against the acquisition of Pixar by Disney. The better-off test asks whether a particular set of business units should be3 working together. To pass the better off test, an expansion in horizontal scope must enable the corporation’s business to create and capture more value together than they could as separate, single-business entities. Using this basic framework provided by the better-off test we can analyse pros and cons of Pixar’s acquisition by Disney.

Points in favour of acquisition:

Shared activities:

The acquisition yields ongoing competitive advantage as Pixar can market its content through Disney’s well established distribution system. The distribution costs of the films for Pixar are lower than that of its competitors.

Shared resources:

Disney CEO Robert Iger knew that for Disney as a whole to be successful, he had to get the animation business right, particularly the new CG technology that was rapidly supplanting hand drawn animation. Acquisition of Pixar was the fastest way of doing this. Through this acquisition Disney would get access to key Pixar technologies which would enable it to produce movies at a lower cost and faster than its rivals. This technology transfer would also help revive Disney’s own animation unit.

Apart from technology, Disney would also get access to all the Pixar characters, which it could use at its theme parks, merchandise stores and its other related businesses.

Disney and Pixar could also share costs of producing the movies and also the benefits from the movies.

Increased industry attractiveness:

Pixar and DreamWorks were two of the biggest and most successful animation studios in the industry. Hence acquisition of Pixar would help Disney to reduce the competition it faced. Also it would allow Disney to create and distribute its own content, thus reducing its dependency on Pixar or any other animation studios.

Points against acquisition:

Cultural clash:

The two companies have a very different culture and this may hinder the post merger integration. Pixar was a relatively smaller organization with an open culture. Disney on the other hand was a huge corporation which followed a hierarchical management structure. There is a chance that cultural clash may lead to exodus of creative talent from Pixar leading to failure of the acquisition.

Coordination and control:

There might be ambiguity regarding who would control Pixar after the acquisition. In absence of coherent transformational leadership from top management, the acquisition may end up destroying rather than creating value.

Stock dilution:

Valued at $7.4 billion Pixar might become an expensive acquisition for Disney. The potential P/E ratio for Pixar was 46 whereas the P/E ratio of Disney was 17. Hence going ahead with the acquisition would be highly dilutive for Disney.

Based on the case information including the 11 exhibits, quantify in USD the potential benefits and disadvantages in the acquisition of Pixar by Disney. Also analyse the risk of the acquisition.

Potential benefits:

Based on information given in the case Pixar generates following average revenues per movie from various sources given below (in million USD):

Box office 537

Home video 602

Television 77

Merchandise 495

—————————————

Total 1711

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Thus assuming that Pixar produces only one movie per year it will boost Disney revenues by at least 1711 million USD.

Potential disadvantages:

The two companies have a very different culture and this may hinder the post merger integration. Pixar was a relatively smaller organization with an open culture. Disney on the other hand was a huge corporation which followed a hierarchical management structure. There is a chance that cultural clash may lead to exodus of creative talent from Pixar leading to failure of the acquisition.

The acquisition may end up being too expensive for Disney. The P/E ratio of Pixar was 46 at the time of acquisition which was considerably higher than the industry average. Disney stock was trading with P/E ratio of 17. Thus the potential deal can be highly dilutive for Disney. Also given the risk of employee exodus from Pixar, such an acquisition may prove to be highly expensive for Disney.

Based on your analysis in questions 1, 2, and 3 indicate clearly whether you recommend Pixar’s acquisition by Disney. Explain your strategic rationale.

The animation industry had changed over the years and by 2005 the new CG technology was rapidly supplanting hand drawn animation. Disney’s traditional 2D animation movies had failed to deliver in recent times. The animation business has been the bedrock of WDC ever since its inception. For Disney to be successful as a whole it had to get its animation business right. Also Disney’s efforts to start its own CG unit in the past had not met much success because of dearth of technology and skilled resources. In such a situation Pixar’s acquisition can give Disney access to Pixar’s proprietary CG technology as well as its skillful and highly creative workforce.

Also Disney’s existing co-production agreement with Pixar was about to expire in 2006. Pixar had refused to renew the contract owing to differences between Pixar CEO Steve Jobs and Disney CEO Michael Isner. Pixar was also in talks with other major media companies for signing a favourable distribution agreement. Losing Pixar to other large media conglomerates would be a huge setback for Disney as it struggles to revive its animation division. Thus the acquisition of Pixar was necessary.

In addition to the above facts, acquisition of Pixar would give Disney access to the Pixar brand and all its characters. A key Disney strategy is to use popular Disney movie characters across its different businesses like theme parks, merchandise, and television and Pixar’s characters would breathe a new life into all these businesses.

Despite near-term dilution of Disney’s earnings per share, many in the investment community believed that, strategically, acquisition of Pixar makes sense. The acquisition fills a critical strategic gap for WDC and can create long term value for the shareholders.

From the above arguments we can see that Pixar is near perfect strategic fit for Disney and hence Pixar’s acquisition by Disney is justified.

If Walt Disney Corporation choose to go ahead with the acquisition

What pitfalls does Disney need to avoid?

What actions would you recommend to Disney to simultaneously start with its due diligence?

Pitfalls Disney has to avoid:

Integration difficulties:

A true hallmark of success in this combination will be whether Disney, reputed for having a highly regimented culture, can integrate Pixar into its family of businesses without altering the latter’s unique, free-spirited, independent work dynamic, which has made it so successful. Any attempt by Disney to enforce its culture and policies on Pixar may affect the work environment and cause skilled employees to leave.

Overestimating economic benefit:

The two companies may fail to achieve synergy through sharing of resources across the merged firm. Sharing of resources between Disney and Pixar may be hampered by conflicts between Disney’s CG animation unit and Pixar’s animators owing to cultural and other organisational differences. Thus the expected economic benefits through the acquisition may not be achieved.

The expense of acquisition:

The acquisition may end up being too expensive for Disney. The P/E ratio of Pixar was 46 at the time of acquisition which was considerably higher than the industry average. Disney stock was trading with P/E ratio of 17. Thus the potential deal can be highly dilutive for Disney. Also given the risk of employee exodus from Pixar, such an acquisition may prove to be highly expensive for Disney.

Inadequate pre-acquisition screening:

Disney may end up paying excessive premium for Pixar because of its inadequate evaluation of Pixar. Disney will have to take into account factors such as financing for the intended transaction, differences in culture between the two companies, tax consequences of the deal and the steps necessary to meld the two workforces.

Recommended actions along with due diligence:

Bidding strategy:

The objective of bidding strategy is to reduce the price that a company must pay for the target company. A friendly takeover bid will be the most effective way to acquire Pixar as it would prevent speculators from bidding up Pixar’s stock prices. Also the deal should be timed when the industry is underperforming or facing short term problems.

Integration:

Despite good screening and bidding, an acquisition will fail unless the acquiring company possesses the essential organizational design skills needed to integrate the acquired company into its operations. Disney should have a plan as to how the resources will be shared between Disney’s animation studio and Pixar and how the actions of the two groups will be coordinated.

Learning from experience:

Disney has grown over the years by making multiple acquisitions. Some of these were highly successful while some were not. Disney should use the lessons learnt from these prior acquisition experiences to make Pixar’s acquisition a successful one.

As of November 2005, what were Pixar’s strategic options? Analyse qualitatively each of these options for Pixar.

As of November 2005 Pixar has the following strategic options other than getting acquired:

Forward integration:

One alternative with Pixar was to integrate forward and start distribution of its own content. Pixar could do this by acquiring some smaller media companies. However this would be a highly unrelated diversification for Pixar and it would face stiff competition from large media conglomerates like Disney, Warner Bros, Fox, Paramount etc.

Find new distribution partner:

Another alternative with Pixar was to form a Lucas-film like deal with some other entertainment conglomerate. Popularity and success of Pixar films had made it possible for them to get a favourable deal from these media conglomerates. However this would mean that Pixar would have to give up the rights to the characters and films they had made in partnership with Disney.

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