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Disney and Pixar Merger

Disney and Pixar Merger

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Published by Ashish123X
An explanation of the advantages and disadvantages of the merger between Disney and Pixar.
An explanation of the advantages and disadvantages of the merger between Disney and Pixar.

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Published by: Ashish123X on Feb 09, 2013
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05/14/2014

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Economics

Ashish Amin

Disney and Pixar Merge
Which firms were involved and what industries did they operate in? On January 24th 2006 Walt Disney agreed to buy Pixar for $7.4 billion in an all stock deal. Initially Pixar was a high-end hardware company selling ‘Pixar Image Computers’ to the medical and governmental agencies. Coincidently one of the main buyers of the hardware computers was Disney which was ‘using the device as part of their secretive CAPS project in order to update their Ink and Paint part of their 2D animation method’ [1]. However, in 2004 Pixar’s head Steve Jobs and Disney Chairman Michael Eisner both disagreed with the working of the other ones firm. Pixar wanted Disney to only do distribution and whilst they would control all the products and get the ownership over the films. Pixar also wanted to finance the films on their own and keep 100% all of their profits. Disney did not agree with this agreement and so a contract was not signed. However, despite all of this the merger and acquisition (when one company takes over another and clearly establishes itself as the new owner) was completed on May 5th 2006. What kind of merger was it? Pixar-Disney was a vertical merger because Pixar specialises in animation and Disney’s main aim is to create cartoon films using the animation. Therefore, this is a merger between two firms in the same industry at different stages of the production process. Moreover it is called a vertical backward integration merger because Disney is buying Pixar who supplies the animation to them. During the merger Disney and Pixar made two types of alliances: Sales Alliance- Both firms would act in their best interests to maximise their profits by marketing their products together. Investment Alliance- The animation pictures will be invested by both Disney and Pixar. Due to this both will receive a 50% share of the profits made from the films. The possible reasons for the merger 1. Synergies seen in combining successful animation experts from Pixar and studio experts from Disney. Synergy is when two or more activities or firms put together can create greater outcome than the sum of the individual parts. 2. Weakness of Pixar to get the required capital. Pixar could not get the cash and goods to generate income and, therefore, this merger would allow the firm to unite with Disney in order to ease the costs. 3. The merger in May 2006 ensured that Disney still received Pixar’s technology. Pixar was the main processor of computer based animation technology of which Disney so desperately needed in order to make their production line more efficient. At present Disney were handdrawing all their animations. 4. Branding of films-DisneyPixar. Branding is a way of increasing the price of merchandise, film tickets and would therefore generate more revenue. In addition before the merger both of

Economics

Ashish Amin

these firms were really famous, but after they join, the name DisneyPixar will become even more famous through the public’s eyes. What were the advantages to the firm? For Disney   It increased the overall welfare of both the Disney and Pixar employees. The culture of the companies was a success. In order to make a success of this merge Pixar proposed a list of guidelines that would help protect ‘their creative culture’. This included allowing Pixar employees to keep their health benefits and not having to sign employment contracts with Disney [2]. In addition Disney also held back on their culture on Pixar. Pixar was able to keep their email system and Pixar executive did not have to work shifts at Walt Disney World. This merger, with its rules set out, ensured that synergies between the two firms were maintained in order to keep the spirits and productivity of each individual in the group strong. The evaluation point for this is explained in ‘what were the disadvantages to the firm?’

Furthermore, at the time when Pixar generated more than 30 billion dollars from its 6 animation motion pictures, Disney struggled with its one production of Chicken Run. Therefore, the merge will enable Disney to use the animating expertise of Pixar in order to create more successful films and thus increase their profits. Also, by acquiring Pixar ‘they would be able to sell merchandise for films such as Buss LightYear’ [3] and earn profits from that without following a distribution deal. Before the merge Disney and Pixar belonged to different stages of the same market. This meant that there was always competition between the firms to see who could create the best animations. In reality Disney could not compete in terms of producing the animations that attract customers as much as Pixar. Therefore, merging with Pixar will reduce this competition for Disney.

Disney will also earn more revenue by merging with Pixar. Merging with Pixar will help them gain a higher stock price and more profit from merchandise. Before the merge Disney used to hand draw all its animations whilst Pixar was using computer generated animation technology. However, after the merge Disney were able to use Pixar’s resources which made it cheaper and more efficient to create animations.

For Pixar Pixar’s main speciality is in animation. However before the merge Pixar had to invest in making merchandise and films. This is now not the case because the merger allows both firms to concentrate on their own strengths and thus increase productivity and sales.

Economics What are the disadvantages to the firm?

Ashish Amin

Although mentioned in the advantages that the culture between the two firms would remain completely separate due to the nature of the rules that had been set out, it is inevitable that some problems will occur. Pixar has been famous for its human resource management in providing the friendly working environment. The firm also puts a lot of emphasis on teamwork whilst Disney’s hierarchial approach to management makes their culture a lot more rigid. In addition Disney’s main aim is to maximise their profits whilst Pixar’s aim is to provide the best quality animations. This evidently will see a clash of cultures but hopefully this will not have a great effect on the quality and efficiency of the products both firms produce as one unit.

Economics

Ashish Amin

Bibliography
[1] http://www.scribd.com/doc/56711406/Case-Study-of-Disney-Pixar [2] http://www.creditunions.com/what-disney-and-pixar-can-teach-cus-about-mergers/ [3] http://www.markedbyteachers.com/international-baccalaureate/business-studies/disney-stakeover-of-pixar-advantages-and-disadvantages.html

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