The Walt Disney Company and Pixar Inc.

To Acquire or Not to Acquire?

Group 8
Amol (065) | Gagandeep (80) | Jay (90) | Ridhi (105) | Surya J (119)
 Disney and Pixar
• Disney’s core capabilities include its wide distribution • Pixar’s core competency lies in its technological successes, such
channels and partnerships, including various options such as its 3D leadership in computer animation.
as movies, television, merchandise and DVD. Pixar owns a number of programs such as Renderman,
Marionette, and Ringmaster, which are all top of the line.
• Disney enjoys benefits due to its large size, including a
large budget to invest on new projects as well as a large • Pixar is made up of a group of very skilled staff, and most
base of talented human resources. technical employees held a PHD. 
Employees are hired at-will with no binding contract, so each
• Due to its past projects and successes, Disney has valuable Pixar employee is hard working, happy, and proud to be a part
knowledge in the movie industry and customer of the company.
preferences.

• Disney has a large fan base and enjoys strong brand • Pixar requires lower operating costs as they make most of their
loyalty and following from customers all over the world software in-house.

• It follows a hierarchical structure, where individuals make • They use the bottom-up approach, where ideas of the mass and
important decisions from top-level management. people are highly appreciated and valued.
 Current Situation
• Agreement inked in 1997 is about to expire
• Increasing bargaining power of Pixar with more stable finances and knowledge acquired in the past decade. The outlook of Pixar
to look for other prospective partners – WB, Sony, 20 th Century Fox – offering better deals than Disney
• Growth of Disney’s competitors - DreamWorks, Fox, MGM, LucasFilms
• Increasing personal conflicts between Steve Jobs and Eisner

1997 Agreement 2004 Negotiations

• 10 year deal, at least 5 films • Pixar shoulders production costs in return for full
• Production cost would be shared equally ownership of films
• Marketing and distribution expenditure would be • Sequel-focused strategy with distribution fee for
funded by Disney, which would be recovered before Disney around 9-10%
profit sharing (50-50 profit sharing) • In effect, Pixar gets access to about 90% of film’s
• Disney retains a distribution fee of 12.5% along with lifetime revenue across all distribution channels.
exploitation rights • Disney could distribute for 5 years, after which rights
• Pixar has final control over production would be returned.
• Pixar receives no share from revenue generated in • Pixar would give up co-ownership of past films.
theme parks, ships etc.
 OPTIONS FOR DISNEY ADVANTAGES LIMITATIONS
• Gain control over all aspects of films, such as • High development cost
Internal Development - Options available
release date and raw materials (HR). • High training and recruiting cost
• Improves overall company quality and • Lack of expertise on technology (CG)
Reengineer Disney Animation to
competitiveness in the industry, which will put front will make it time consuming
better compete with Pixar
Disney ahead of the industry
• Financial capabilities can be achieved, they can • Difficult and costly to negotiate new deal
Strategic Alliance produce higher quality products with higher • Pixar, which is better than many other
input cost. alternatives, becomes a competitor
( A studio other than Pixar, such
• Working with other companies with different • Creation of synergies with new partner
as Warner Brothers, Fox,
strengths, Disney can diversify its products and may fail or need extra efforts
DreamWorks, Universal, MGM,
produce varied genre of films
or Paramount)
Strategic Alliance • Less expensive compared to acquisition • Re-negotiation terms are not matching
(continuing existing partnership • Since previous collaborations such as Toy Story • Pixar could break the relationship and
have been successful, it would be beneficial for work with other companies
with Pixar through a distribution
Disney • Risk of losing the rights to films, sequels
agreement as demanded by Pixar)
and characters’ use in theme parks
• Reduced revenue with new terms of Pixar
• No division of revenues • It would dilute Disney’s P/E ratio heavily
 Ally or Acquire?
Criteria Industry Resultant Reasoning
Situation Solution
Type of Synergy Sequential Equity Alliance Pixar is in charge of production while Disney then
decides the release date & distributes it
Nature of Resources Soft Equity Alliance Critical element - creative skill lies with the human
resources
Extent of Redundant High Acquisition Merging with Pixar gives impetus to Disney’s CG wing
Resources
Degree of Market Low/Medium Acquisition Tech Uncertainty – very low
Uncertainty Customer Usage – very high
In animation
Level entertainmentHigh
of Competition industry, criteria 2,3 and 4 are
Acquisition critical.
Barriers To avoid
to entry thedue
falling employee exodus
to easy access to which
might result due to acquisition, keep Pixar as a separate entity giving them the artistic freedom and keeping
technology
the “Pixar Culture”.
Collaboration
Ally or Acquire?
Narrow
Scope

Wide
High

Low

Goal Compatibility

1991 1997 Today 2006

Timeline End of
agreement

Agreement 1 Agreement 2 Re-negotiate?

 Financial Analysis of Acquisition Deal
Total Income = $519 mn (Exhibit 8)
Distribution Fee = 10%

Minimum Value Average Value Maximum Value

Discount Rate = 12% Discount Rate = 11% Discount Rate = 10%

Growth Rate = 4% Growth Rate = 4.25% Growth Rate = 4.5%
Movies per year = 1 Movies per year = 1.25 Movies per year = 1.5
Net Present Value = $ 5.838bn Net Present Value = $ 8.65bn Net Present Value = $ 12.739bn
(Exhibit 11)
Currently Pixar is producing 1 movie pa. In case the acquisition happens, better synergies can be obtained between Disney
and Pixar and more movies can be produced (This is possible only if the organisational culture of Pixar is retained)
Therefore, the valuation of $8.65bn is a reasonable figure to compare to the final deal.
Hence, based on the financial analysis, acquisition is a viable option

*For the simplicity of calculations, we have only considered revenue from the films
 Recommendation
Acquiring is the best option for Disney considering the value and talent that Pixar would bring into the firm as the
leader in the computer generated animation industry.
Through the merger, Disney would receive access to Pixar’s top of the line technological capabilities and talented
human resource, while Pixar would benefit from Disney’s access to funding, vast distribution channels, and
capabilities to produce merchandise.

Possible concerns which may arise in case of acquiring Pixar

• Leadership
• Maintaining separate identities and brand
• Retention of talent
1. Integration of Pixar Senior Management with Disney
2. Retention of Pixar HR practices
• Financial Stock Dilution
1. Change in ownership structure of Disney
2. Pixar shareholders stood to gain immediately, while Disney shareholders had a long term time stand
Thank you!