WALT DISNEY COMPANY AND PIXAR INC.

CASE ANALYSIS

SUBMITTED BY –
GROUP 7

ADITYA DURGA (127)

GAURAV SURI (146)
VAIBHAV BIYANI (184)
SHAIFALI BHANDARI (175)
AKASH SEHRA (193)
SHRUTI KHANDELWAL (236)
ALTERNATIVES AVAILABLE TO WALT DISNEY

1. Re-engineer 2. Strategic alliance

• Internally Developed 3D animation tech. • New alliances with other studios

• Acquire human and technological resources • Higher bargaining power due to existing
• More bargaining power with vendors brand name in the segment

3. Negotiate – Pixar 4. Pixar Acquisition

• All revenues in Disney

• Provide Caps access
• Market Leaders – No competition
• Shared production costs
• New Competency generated with CGI 3D
• Disney gets option to acquire in future
animation
DETAILED ASSESSMENT OF AVAILABLE ALTERNATIVES <1/2>

OPTION 1: RE-ENGINEER DISNEY ANIMATION TO BETTER COMPETE WITH PIXAR

• New In-house capabilities • Lack superior animation capabilities

• Less power to outside vendors • Failed previous attempts

• High returns • Won’t be easy to make it a competitive advantage

OPTION 2 : STRATEGIC ALLIANCE WITH ANOTHER ANIMATION STUDIO

• Higher bargaining power – in hands of Disney • Pixar – Top player in market

• Fast solution to the animated studio problem • No other firm can offer as much success

• Other Animation studios used Pixar’s licensed software –

no new cutting edge tech available
DETAILED ASSESSMENT OF AVAILABLE ALTERNATIVES <2/2>

OPTION 3: NEGOTIATE A NEW DISTRIBUTION DEAL WITH PIXAR

• Shared production costs • Bargaining Power with Pixar

• Disney can spend more time in deciding whether to • Less revenue share for Disney
shift to acquisition/ equity alliance, etc.
• Less avenues to have ownership for sequels

OPTION 4 : ACQUIRE PIXAR

• Use of Apple’s brand image • Expensive ordeal - Heavy dilution of Disney’s P/E ratio

• All revenues with Disney – Complete Ownership • Difficult to create reciprocal synergies

• Long term benefits – In house – competency generation • Loss of soft resources – creative human resource
CASE FRAMEWORK EVALUATION – WHY ACQUIRE?

Non-Equity Equity
Factor Acquisition Reasoning
Alliance Alliances

 The work required an iterative knowledge sharing process

Synergy Type Modular Reciprocal Sequential
and task execution as evidenced in the animation industry

 Intellectual resources in the form of highly talented people

Nature of Resources Low Low/Medium High
with CG skills

Redundant Resources Low High Medium  Both entities had CG expertise and related software

The CG technology was fairly superior compared to the

Market Uncertainty Low Low/Medium High other existing technologies. It was well accepted among the
viewers as observed by Pixar’s box office success
More and more animation firms had adopted the CG
Competition Level Low High Medium
technology and it reduced the entry barriers
 RE-NEGOTIATING WITH PIXAR – DOES IT MAKE SENSE?
New Renegotiating the deal under the following terms
Parameters Actual Alliance

Pixar Revenue 247.25 480.528 1. Disney handles distribution and marketing

2. Distribution fee paid to Disney = 8%
Pixar Total Income 199.25 384.528
3. Pixar handles the production and other costs
As a % of total Income 39% 75%
does not make sense for Disney neither financially nor
Disney Total Income 315.75 130.472 strategically.
As a % of total Income 61% 25%

This implies that Disney should go ahead with the acquisition of Pixar

The two important issues that would need to be addressed are :

Microsoft Excel
1. Stock dilution Worksheet

2. How to keep the creative culture intact?

3. How to retain employees in the target organization?
 ACQUISITION FINANCIALS
Combined Entity
2005A 2006E 2005A 2006E 2005A 2006E
Revenue 31,944 33,541 274 370 32,218 33,911 For the combined entity
COGS 27,837 29,229 30 40 27,867 29,269 1 - exchange ratio for the calculation of
% of revenues 87% 87% 11% 11% 86% 86% number of shares is taken as 2.3:1
Gross Profit 4,107 4,312 244 330 4,351 4,642 ( Disney : Pixar)
% margin of revenues 13% 13% 89% 89% 14% 14% 2 - tax rate is assumed to similar to
Non-operating Income 5,137 5,394 209 282 5,346 5,676 Disney's for the year 2005
% margin of revenues 16% 16% 76% 76% 17% 17% 3 - Growth rate assumed to be 5% for
Pre tax income 3,987 4,186 221 298 4,208 4,484 Disney and 35% for Pixar based on
% margin of revenues 12% 12% 81% 81% 13% 13% CAGR of last 5 years
Income tax provision 1,241 1,303 79 107 1,304 1,390
Income tax percentage 31% 31% 36% 36% 31% 31%
Net income 2,533 2,660 142 191 2,904 3,093
% margin of revenues 8% 8% 52% 52% 9% 9% Exchange
2005A 2006E
Number of shares 2,106 2,106 119.09 119.09 2,379.91 2,379.91 Ratio
EPS 1.20 1.26 1.19 1.60 1.22 1.30 2.30 0.02 0.04
0.02 0.04 2.64 0.00 0.02
Accretion / dilution 2.70 -0.005 0.01
1.44% 3.17%

The deal would remain accretive until an exchange ratio of 2.5:1, being almost neutral at 2.64:1 and diluting thereafter. Given the trends of
loss of wealth post a merger due to various costs, this deal does make sense financially, given the above assumptions.
WALT DISNEY’S MODE OF GOVERNANCE - CHOICES

The high asset

specificity and
recurrent use of Pixar’s
animation excellence
creates a case for
insource/ acquisition of
Pixar by Walt Disney

Insource/
Acquisition

TRANSACTION COST ECONOMICS

POINTS TO BE CONSIDERED DURING ACQUISITION

• Lay out well defined property rights between the two entities (e.g. distribution and marketing with Disney while
character design, storytelling etc. with Pixar)

• Be wary of the agency issues that may arise (e.g. Pixar restrict itself to one movie per year and let its employees
invest time in R&D – maybe in conflict with Disney animation’s modus operandi)

• Retain Pixar as a separate entity and brand under Disney’s umbrella for the development of the animation films
(similar to Miramax productions) ensuring Pixar’s culture and its people asset stay intact

• Offer senior members of Pixar (Catmull and Lasseter) executive positions in the Disney hierarchy to foster
organizational commitment among Pixar’s employees

• Closely look at the current HR and talent practices followed at Pixar – perhaps keep it intact/make slight
amendments
THANK YOU