Case study

Subject: Merger of ‘Pixar Animation Studios’ with the ‘Walt Disney Company ‘ Merger Period: In Jan 2006 Walt Disney agreed to buy PIXAR for $7.4 Billion I. Overview (Oanh) In January 2006, the US based media and entertainment company Walt Disney announced that it would acquire its animation partner Pixar for US$ 7.4 billion in stock. The case primarily examines the partnership agreement between Disney and Pixar and puts forth the incidents that led Pixar to look out for other partners. The case highlights the advantages and pitfalls of the deal for Disney and Pixar. Now we will find out the true story behind that. Firstly, let’s start with the history of two parties. Pixar Pixar begins in 1979 as the Graphics Group, which is a part of the computer division of Lucasfilm. In 1986 Steve Jobs bought the company from George Lucas for $5million and ads another $5million of capital. The newly formed company was headed by Jobs, who served as Chairman and Chief Executive Officer of Pixar. In 1990, Pixar went through a rough time selling its hardware technology and imaging software to Vicom Systems. However, the following year it managed to secure a $26 million deal with Disney to produce three computer-animated feature films, the first of which is Toy Story. The alliance had begun. In 1995, Toy Story was released and became the highest grossing movie of the year, making $192 million in U.S box office and $362 million worldwide. At the same time Pixar went public, offering 6,900,000 shares at $22, beating Netscape as the biggest IPO of the year. Disney The Walt Disney Company was founded on October 16th 1923 by brothers Walt and Roy Disney. Walt Disney is one of the major companies in the world that has provided entertainment to generations of fans since 1923. The company together with its subsidiaries consists of four main segments: media networks, parks and resorts, studio entertainment and consumer products. In 1927, Walt decided to pursue all-cartoon series and the mouse is born. Mickey Mouse became an overnight sensation and a series of cartoons followed. Walt Disney created Disneyland in 1955. The park was a huge risk for the company, as it had taken millions of dollars in bank loans to build it. But it paid off. It became an enormous success and finally put the company in solid financial footing.

Pixar would develop and produce three computer animated feature films. Disney agreed to acquire Pixar with 2. This partnership built huge profits for both companies. The Incredibles. Under this Agreement as mentioned. Pixar and Walt Disney entered into the Feature Film Agreement. In 2004 both companies attempted to reach a new agreement. II. and the whole acquisition was completed shortly after that. Inc. The movie’s revenues of these movies were shared 50% to each partner. Background Context (Oanh) In May 1991. However as time passed by. the total box-office revenue from these 5 movies was more than $3 billion. Pixar also wanted financial freedom. Disney would only do the films distribution and get 10 to 15 percent from the distribution fee. This alliance would enable both Disney and Pixar to collaborate without the barriers that comes from producing the product from two different companies with different shareholders and management teams. This was unacceptable to Disney. In early 2006.A lot of their earlier films were animated adaptations of children’s fairytales. On May 5th the shareholders of Pixar agreed on selling the company to Disney. The fact that Steve Jobs was the major shareholder with more than 50% allowed this deal to be done quickly. and Cars. However.4 million in an all stock deal. which ended up failing. They had tried for a long time to rejuvenate their own animation operations. . on an exclusive basis. which means that they would finance the films on their own and collect all the profits. Finding Nemo. since other partners saw Pixar's terms as too demanding.2006 and was pending the approval of the shareholders. or let Pixar go somewhere else. Pixar to produce five animations for distribution by Disney . The conditions under the negotiation included Pixar having control of the entire products. A few years later in 1997 Pixar and Disney entered into Co-Production Agreement which defined. and they just couldn't get it nailed.Kim Masters said that: "I don't think Disney had any choice about doing this deal with Pixar. but Pixar would not concede.. with Jobs declaring that Pixar was actively seeking partners other than Disney. Pixar did not enter in negotiations with other distributions.3 Disney’s shares issued for each Pixar’s share and merged two companies worth $ 7. The options were: Bring Pixar in.A Bug’s Life.01. getting the ownership over the films and also the films in production under their old agreement (and some other conditions). They broke down completely in mid-2004." It was either acquiring Pixar or having a possibility of a competitor purchasing it. III. Monsters. some issues occurred amongst the two parties. Disney would be responsible for its marketing and distribution. The deal was agreed on 24. Timeline (Nga) NPR correspondent Mr.

in order not to dilute the excising shareholders. IV. VI. At the time of the merger announcement. Jobs became the biggest sole holder of Disney´s stock (with 7% control). the price of Disney´s stock was $25.3 shares of Disney. it appears that Disney tried not to “dilute” Pixar’s competency as much as possible and leveraged Pixar’s strengths to enhance Disney’s creative capability rather than controlling it strictly. So effectively.50/share. Upon the completion of the transaction. In addition to separating Pixar at the organizational level. Disney tried to leverage Pixar’s brand and capability to enhance Disney. so it was a 100% equity transaction.52/share and Pixar´s was $57.3 billion dollars for Pixar. The Transaction (Nga) The actual transaction of Disney purchasing Pixar was relatively straightforward. Disney agreed to convert every share of Pixar into 2. V.As any other major merger. To start with. for anti-trust considerations. However. Instead of branding new films as new “Disney” product. The benefits for each partner can be identified as the followings. It shows that Disney took motivation and loyalty of employees of Pixar fully into account to avoid having many employees leave due to the merger. Disney issued 279 million new shares in order to do the transaction. it chose to keep “Pixar” brand by using “Disney-Pixar” brand for the products produced by Pixar after the merger (“Cars” was the first product distributed under the new brand). with Pixar having $1. Benefits. and sharing the remaining 20% of the capital with Pixar shareholders The price (in stock) that was set by Disney was $7.6% of the shares. So the actual impact on the balance sheet of Disney could be seen as paid in cash for 80% of the deal.1 billion in cash and equivalents. Disney bought back 225 million shares in the market. Negotiation and Agreed Conditions (Nga) Even though Disney acquired 100% shares of Pixar and made it a wholly-owned subsidiary. Disney paid $6. .4 billion. All the regulatory approvals were received before the final vote of the shareholders. Synergies and Trade-offs of the deal (Phương) The alliance between Disney and Pixar will yield great benefit to both parties. the deal had to be approved by regulation. Steve Jobs founded Pixar and was a major stakeholder with 50. both companies agreed to keep both Disney and Pixar’s production units separated.

without investing in production line for making merchandise and home entertainment. stockholders got an increase share price from merging the two companies. Merging with Pixar will help Disney to generate new sources of revenues from high-quality new type of films and to get more profit from merchandise and theme park tickets. toys. They can exchange the valuable human resource between Disney and Pixar. compared to $3. after the deal. One was that Disney – with its sheer size . The financial results (and here we only look at the Box office success.2 billion in the previous 9 years. Moreover. Considering the structure of this deal. etc) clearly prove this success. which will turn in an increase of productivity and generate more sales. and so on. not taking into account the retail revenues Disney achieved through its wide distribution and sales network in its Parks. Both parties can market its production together and get more profit. Decrease in competition mainly because Pixar is the large player in the industry in terms of developing and producing computer animation films. There were two major issues that the public and Wall Street feared after the acquisition of Pixar through Disney. With regards to synergies.would trample Pixar’s creative power and turn the Pixar executives into mere Disney-puppets. At the time Disney started developing its computer animation films.Disney • • • • Pixar • • • Focus on its core strengths in producing the computer animation. Increase in revenue by merging with Pixar. For example.8% in regular trading. Access to computer generated imaging technology. the team up of these two big animation production companies will enable better human resource. both companies can concentrate on their individual strengths. produced even top hit motion pictures. which in collaboration with Disney can greatly increase its market power. Disney has the various lines to produce merchandises and have a place to distribute so Pixar also gain the benefit of being able to produce the other lines of products such as apparels. Increasing capital To acquire core strengths of Pixar in producing computer motion pictures.1 billion in Box office revenues in only 5 years. which enables them to better. shares of Pixar gain nearly 3% from after-hours trading and Disney’s stock gained about 1. Post Merger Overall it was a very successful integration. The other scenario depicted a spoiled team of Pixar executives and animators. Since the merger. Disney-Pixar generated $4. . Pixar already generated more than 30 billion dollars from its 6 animation motion pictures. completely unwilling to make this partnership a success and not respecting the requests of its new owners.

the revenues in retail products reached about $5billion for Disney for “Cars” only (through an online world. etc). Despite many mergers that destroyed more value than they were anticipated to create (especially in the media sector). On the contrary. Title Monster University Brave Cars 2 Toy Story 3 Up Wall E Ratatouille Cars The Incredibles Finding Nemo Monsters. etc). One successful example for this opportunity is “Cars”. both apprehensions didn’t materialize. Disney and Pixar made it work. an ice-skating show and a “Cars” world in Disney World. the merger is noteworthy for the success it had and how apparently easy the integration was so far. Wall street showed its content with this deal with an average stock price of $25 before the deal. about $35 after one year and still a stable $30 after almost two years. channels.063M $731M $521M $624M $631M $631M $868M $526M $485M $363M $362M The main reasons for this great result are as follows: * The investors see potential for Disney to leverage Pixar’s computer-animated character to be used across its vast network (parks. Inc Toy Story 2 A Bugs Life Toy Story Year 2013 2012 2011 2010 2009 2008 2007 2006 2004 2003 2001 1999 1998 1995 Box office $552M $1.But luckily. . While it was not one of the biggest blockbusters for Pixar/Disney (“only” $460million in the cinemas and $27million in DVD sales).

. before Pixar’s executives feared a loss in quality and damage to the brand.The strength of pixar animation was supported by the money of Disney and made it a force to reckon with and successful. which was categorically impossible. Not only did Pixar decide to not mainly push for new movies anymore. but also allow for sequels (Toy Story. The executives also changed their mind on another production channel: Direct-to-DVD was now also a part of Disney-Pixar’s portfolio.• • Pixar’s willingness to change and adapt to being part of an international conglomerate. Pixar even allowed the partial production of these movies to be performed by outside animators from India. The experience of Bob Iger (having been bought with his companies twice himself) how a merger should be done was also a key influencing factor for its success. What was the final outcome of the merger? Was it a win-win or a win-lose situation ? Win-Win deal . For Disney it was a adding muscle to its existing animation strength with a stronger partner. Cars).

g. Iger was that a successful merger cannot happen in a rush. the health benefits) and concrete guidelines on how to protect Pixar’s creative culture. a Pixar executive was quoted in the NY Times 1: “We’ve never had to go back and look at it. There is a steering committee that oversees animation for both Disney and Pixar studios. Credit Suisse First Boston 2 in” Mr. “My philosophy is exactly the opposite. Drewry. whereas this policy exists in Disney. Regarding this list of promises. Also Pixar employees were not forced to sign an employment contract.William B. the executives agree on a detailed list of things that Pixar would not have to change after the merger (e. Everything they’ve said they would do they have lived up to.” One of the key-learnings of Mr.(phần dưới này là thông tin tham khảo) "We are big believers that Disney buying Pixar would be a smart strategic move that could have very positive intermediate-term financial returns for Disney. You need to be respectful and patient.nytimes." . "Animation has always been the heart and soul of the Walt Disney Company and it is wonderful to Bob Iger and the company embrace that heritage by bringing the outstanding animation talent of the Pixar team back into the fold.” This becomes visible in many details (such as keeping the same email-addresses for Pixar employees or no forced adaption of the strong corporate culture of Disney) but mainly the overall trust that was build over time and acknowledged by Mr. Research Analyst. Iger said." Roy Disney Jr. “There is an assumption in the corporate world that you need to integrate swiftly.html?pagewanted=all . with the mission to maintain and spread the Pixar culture. The two companies strictly followed the well-known tactics to make a merger work. 1 www. Lasseter when he said: “It took about a year before there was a collective letting down the guard”. like effective communication to the employees but also came up with some more unusual approaches. in 2006. For example.

3 2 3 www.html?pagewanted=all Haley and Sidky 2009: Making Disney Pixar Into A Learning Organization . then dispatch your newly purchased experts into other parts of the company and let them stretch their muscles. One analyst.Analysts identified another key-factor for the success of this merger. which they achieved! The influence Pixar had at Disney becomes clear when John Lasseter says: “Disney has become a filmmaker-led studio and not an executiveled studio. familiar with the deal. commented in the NY Times 2: “If you are acquiring expertise. Their ability to lead teams that bring a willingness to quickly adapt to new challenges in a rapidly changing environment is legend and (as seen above) also works in Disney. We are very proud of that.” Disney did exactly this by assigning the Pixar team to turn around Disney’s animation department. Bob Iger gave the new talent acquired through Pixar extra responsibilities to help improve Disney and drive it into a new direction. The transformational leadership of the key-leaders (Steve Jobs and John Lasseter) in Pixar was brought into and widely adopted by Disney.” Another key factor to ensure Pixar’s influence at Disney was that the deal required that Pixar's primary directors and creative executives also had to join the combined

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