Pixar&Disney Team 5

NATIONAL CHIAO TUNG UNIVERSITY GLOBAL MBA GLOBAL TECHNOLOGY STRATEGY

Case Analysis IV

Team 5: Tayi Lin (0053022), Jirawut Tachawongsuwon (0053023), Ooi Car Len (0053024), Elma Mulaomerovic (0053026)

1. Which is greater: the value of Pixar and Disney in an exclusive relationship, or the sum of the value that each could create if they operated independently of one another or were allowed to form relationships with other companies? Why? Walt Disney Studios announced that it would acquire Pixar in a stock deal worth $7.4 billion on January 24, 2006 and agreed to convert every share of Pixar into 2.3 share of Disney. Therefore, this deal did not dilute the existing Pixar’s shareholders interest and wealth and Steve Jobs turned out to be Disney’s largest shareholder. The value of synergy is greater when Pixar and Disney form an exclusive relationship because it benefits to both parties. For example, after the merger, both of them could maintain their two separated animation facilities which mean that they can keep their employees. Also, Pixar which is very good at producing computer animated featured movie will keep working on its core competency while Disney would be responsible for the marketing and distribution. Even though Disney acquired 100% share of Pixar and it appeared that Disney tried not to dilute Pixar’s competency. Disney tried to utilize Pixar’s strengths to enhance its creative capability. For example, Disney tried to leverage Pixar’s brand and capability such as it chose to keep “Pixar” brand by using “Disney-Pixar” for marketing its new movie called “Cars”. In this collaboration, both Disney and Pixar can form more stronger and powerful team where more talented human resource will be provided. They can exchange the knowledge by work sharing or experience sharing. Also, the most critical element would be decreased the competition between Disney and Pixar because Pixar was the largest player in the movie industry in terms of producing computer animation movie. Therefore, Disney could strongly increase the market share resulted from this collaboration. The best evidence to support that the value of Pixar and 1

Disney is greater in an exclusive relationship could be explained by looking at the achievements for both Disney and Pixar on 2008. 2. Assuming that Pixar and Disney are more valuable in an exclusive relationship, can that value be realized through a new contract? Or is common ownership required (i.e. must Disney acquire Pixar) 3. If Disney does acquire Pixar, how should Bob Iger and his team organize and manage the combined entity? What challenges do you foresee, and how would you meet them? Acquisitions are known as source of technology, knowledge, knowhow, resources, market shares and other companies’ values. Therefore through acquisitions companies are seeking for increasing if their market position, but also for gaining new core competences that will lead them in success. However, acquisitions are not easy for managing. Post-acquisition time is very period is very hard. Acquisitions involve at least two different companies. Those companies have different management styles, different culture, organization matrix, decision making process and ect. Those differences are one of the leading problems that lead to failure of acquisition. Research conducted by Harding and Rovit (2004) involving over 50 case studies, 15 years of merger and acquisition data, and survey of 250 senior executives found a 70% failure rate of acquisitions. Bob Iger should be awake of those findings and try to solve common and potential problems that lead to acquisition failure. Biggest potential problems are related to integration of two companies. Big challenge for Bob Iger would be integration of two different cultures. Pixar’s culture is based on creativity and innovations. Its employees are treated more generously 2

than Disney employees. Employees are very important factor in the success of Pixar, so Bob Iger should keep employees satisfaction after the acquisition. Also he should make a smooth integration of Pixar’s and Disney’s culture. He should found which norms from which organization are necessary for continuing growth and should develop them. This means he should create new organization’s culture based on best norms from both companies. Most important reasons for acquisitions are resources, knowledge and knowhow. Bob Iger will have the challenge to make two organizations to communicate and share their knowledge. Therefore he should create environment for development of learning organization. This will allow company to achieve high growth, do successful business and meet all upcoming challenges. Beside employees and organization culture, two very important characteristics of an organization are vision and management. Therefore Bob Iger will be faced with challenges related to creation of common vision and management style for both companies. Also Bob Iger will be challenged with forming a new management team that will successfully lead companies after the acquisition. Every company has its own vision. Challenge for post-acquisition process is generating new joint company vision that will be leading vision for both companies and employees. New vision will give shared goals and objectives for companies and give directions for achieving those goals. It is necessary to create new vision for the company and avoid following double visions and objectives of Disney and Pixar. Post-acquisition process requires forming of new management team. Challenges for Bob Iger would be to form a successful management team that will be real leader for all company employees. Management team should change its attitude towards new company vision and 3

objectives. Management team should provide clear leadership toward new objectives and visions. Bob Iger’s biggest challenges are related to integration of the companies, creation of new vision and objectives, new management team who will be leader toward adaptation of new objectives and integration of new company culture. 4. As of 2006, Disney acquired Pixar. How do you value this merger? Three investment banks helped to create this deal. From Pixar’s side it was Credit Suisse, while from the opposite side there were Bear Stearns and Goldman Sachs’ lead by the head of technology M&A. It could be seen that the top investment bank with a senior officer was involved in the deal, and the importance the investment banks. The actual transaction of Disney purchasing Pixar was relatively straightforward. Disney agreed to convert every share of Pixar into 2.3 shares of Disney, so it was a 100% equity transaction. Disney issued 279 million new shares in order to do the transaction. However, in order not to dilute the excising shareholders, Disney bought back 225 million shares in the market. So the actual impact on the balance sheet of Disney could be seen as paid in cash for 80% of the deal, and sharing the remaining 20% of the capital with Pixar shareholders (assuming that the existing shareholders did not sell their shares during the buyback). The price (in stock) that was set by Disney was $7.4 billion, with Pixar having $1.1 billion in cash and equivalents. So effectively, Disney paid $6.3 billion dollars for Pixar. At the time of the merger announcement, the price of Disney´s stock was $25.52/share and Pixar´s was $57.50/share. The exact price of Pixar´s stock for the transaction was an average market price for 4

5 consecutive days, ending at 2 days before the announcement. Steve Jobs founded Pixar and was a major stakeholder with 50.6% of the shares. Upon the completion of the transaction, Jobs became the biggest sole holder of Disney´s stock (with 7% control). According to Thomson Financial, Pixar´s stock was trading at 84 times the annual earnings and was the most expensive in the industry. Disney´s stocks, however, were trading only at 17 times to the earnings, making them one of the cheapest in the industry. It was believed that such difference in multiples was due to the fact that Pixar was a leader in the industry with 6 blockbuster movies, while Disney was looking for a driving engine to increase sales. The result was that Steve Jobs “exchanged” expensive stock into a cheaper stock, and a transaction like that might look decretive to Disney´s shareholders. However, there was a strategic angle in this acquisition. Year

Target

Deal Size

Premium

Payment

1996

ABC

19 billion USD

27%

60% Cash + Stock

2006

Pixar

7.4 billion USD

3.8%

100% Stock

2009

Marvel

4.3 billion USD

29%

60% Cash + Stock

As a matter of fact, Disney paid $59.78/share to Pixar by giving Disney’s stock. The premium over Pixar’s stock price is at 3.8% (the share price was $57.75 on Jan, 24th). Considering that this deal took several months to complete and the stock price surged 10% since the beginning of 2006 due to the speculation over this deal among investors, we could consider the real premium to potentially exceed 10%. However, considering that Disney paid much more premium to the target companies’ shareholders when they merged ABC and Marvel, this 10% could be considered as “cheap”.

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