Walt Disney along
with Pixar impacted the entertainment industry in a revolutionary manner when
they escalated the use of three dimensional computer generated (3D CG)
technology. This greatly enhanced viewer experience at a time when animated
movies were growing in popularity. These movies, in particular, attracted the
attention of children primarily due to the concept of sequels, which had
extended the lifespan of hit movies. However, owing to the increasing success
of animated movies as a result of the Disney-Pixar partnership, competition in
this space became fierce as barriers to entry reduced and several production
houses like DreamWorks and Paramount Pictures entered the industry. This
prompted Disney to consider the future of their relationship with Pixar and
take a critical strategic decision to ensure that they stayed on the pedestal.
Business Model
While ‘creative
people’ were one of the crucial elements that both Pixar and Disney had in
common, the innovative culture of Pixar helped maintain their technical
superiority. Their proprietary computer animation technology gave Pixar a
distinct advantage in the software development industry. The production of
animated commercials was an additional source of revenue. Steve Jobs was also a
valuable intellectual asset who significantly contributed to Pixar’s success.
Pixar created a flat and flexible organization that gave more autonomy to the
firm’s artists. Walt Disney was the frontrunner of
animated children’s movies. They employed the most talented story writers in
the business and owned the most advanced production studios. Although box
office sales were a major source of revenue and a triggering signal for
success, Disney’s actual financial success derived from alternate revenue
streams such as the sale of toys, apparel, books, television showings, home
video sales and video games.
Disney and Pixar joined hands to produce five animated movies in a
partnership lasted a decade. Disney focused on marketing and distribution,
while Pixar predominantly provided technical support. Disney received 60% of
the movie revenue and held the right to produce sequels, schedule the release
dates, and select the locations.
Principal Issue
The principal issue
in this case is a decision. Robert Iger, the newly appointed CEO of Disney must
decide whether Disney should acquire Pixar in an effort to cement its position
as the leading producer of animated children’s movies, being the largest media
conglomerate in the world.
Subsidiary Issues
· As a result of technological advancement
and the growing propagation of talent in the CG space, competition became
fierce with several new players entering the industry. The impending
contractual expiration of the Disney-Pixar partnership was piling increasing
pressure on Disney to make a decision regarding the future of this relationship
under these circumstances.
· Owing to varying cultures at Disney and
Pixar, this might repel existing employees of Pixar as they might think they
would lose freedom and flexibility of work as well as other essentials that
they were enjoying under Pixar.
· Given that Pixar’s enterprise value was
$5.9 billion, Disney would have to pay an additional premium of $6.5 - 7.4
billion, in addition to stocks with a 2.3:1 exchange ratio that could be very
costly and could diminish stockholders value.
· This acquisition will also be heavily
dilutive as Disney’s price-to-earning (P/E) ratio was 17 while Pixar’s was 46;
this would repel investors and reduce shareholder value.
Performance
The decade long
Disney-Pixar partnership had been regarded by many as one of the most
successful in the industry’s history, grossing over $350 million in their first
three movies between 1995 and 1998.
Between 98’ and 04’, Pixar contributed to 10% of Disney’s revenue
and over 60% of its total operating income.
Many of the great animated hits that represented the new
generation of 3D movies, were an outcome of this co-production. This fruitful
performance prompted Disney to purchase 5% of Pixar for $15 million in 97’,
soon after its IPO was issued. It was also the largest IPO of the year, raising
$140 million.
In 2004, amid reports that the relationship between Pixar CEO
Steve Jobs and his counterpart Michael Eisner had broken down, potentially
threatening contract renewal negotiations, Disney resolved to replace Eisner
with Robert Iger in an effort to preserve the relationship - A clear indication
that Disney valued Pixar’s contributions.
This five movie deal which took these two titans through the
release of ‘Cars’ in 2006 was also estimated to add over $1.5 billion in
operating income and $0.44 in EPS to Disney’s bottom line. By far, the
performance of the Disney-Pixar partnership paved the way for a new era of
animated movies, using the jointly developed 3D CG technology. It also outlined
the most significant part of Pixar’s history with both companies enjoying a
great exchange of talent, resources and learning.
Alternative Decisions
Robert Iger must
reflect on which of the following three alternatives are best for Disney’s
future.
· Re-engineering Disney Animation to
better complete with Pixar, effectively striking a distribution deal with
another animation studio. This would mean that Disney would have to forfeit
their long, successful relationship with Pixar and all the investments they put
into it. They would then have to broker a contract with another studio to fill
Pixar’s void, assuming all the uncertainties that would come with it and
starting from scratch with their new partners. This would also mean that Pixar could
now become one of Disney’s biggest competitors - A problem that Disney would be
creating for itself.
· If Iger decided to stick with Pixar, he
will have to negotiate a new distribution deal and give into some of Steve
Job’s demands which included 100% ownership of all films and a lower, fixed
distribution fee for Disney.
· The last option available to Iger is
for Disney to acquire Pixar and integrate it into their organizational
structure.
Criteria for Choice
· Importance of animation to Disney’s
corporate strategy since Disney-Pixar joint movies have achieved the highest
revenues and have contributed the most to Disney’s operating income. Thus, continued
strong financial performance for Disney by improving its average revenue growth
and EBIT margin as well as maintaining healthy cash flows is crucial.
· Maintaining an alliance with Pixar
since it is better for Disney to collaborate with Pixar than compete with them.
Pixar could easily become a major competitor and can take over a good part of
Disney's market share after the partnership dissolves.
· Comparatively lower risk option: The
purchase acquisition estimation should not be overpriced, and should be
compared to benchmarking acquisitions in the market. Disney must also retain
the ownership of movies and the right to produce sequels.
· Least alteration to the current
successful operation, and retention of the creative and technical mix of
talents that was produced by the partnership. Disney’s decision should not ruin
the stellar performance Pixar has been achieving for them.
Recommendation
Based on the analysis
of these alternatives and in light of the stated issues, we recommend that
Disney go ahead with the acquisition of Pixar primarily because of the proven
success that their partnership had displayed and secondly, on account of the strong
strategic fit which was evident. In addition, Disney would gain a major asset
in Steve Jobs who, at the time, was accredited with the highly successful
launch of the Apple iPod and was regarded as the greatest modern day visionary
leader and inventor. The prospect of pairing Jobs and Lasseter with Disney’s
talented executive team was also very lucrative. Jobs was also at the help of
Apple computers at the time and an affiliation with Disney would be mutually
beneficial for all the three brands from an image standpoint. Moreover, the
projected PE ratio of Pixar was 46, while that of DreamWorks, its closest
competitor, was 30, making Pixar the undisputed leader in the CG technology
space. Also, as things stand, Disney is a saturated
company with average revenue growth of only 5.3% and Earnings before interest
and tax (EBIT) as a percentage of revenue of 9.6%, while Pixar is a prosperous
and promising company with an average revenue growth of 39% and 53% EBIT
margin.
However, the decision to acquire Pixar also has significant
drawbacks. First of all, Pixar and Disney were very different owing to varying
cultures that could result in a clash. Disney would be poised with the daunting
task of either integrating Pixar into its organizational culture or allowing
Pixar to operate independently. The former would suggest that Disney would have
to disregard Pixar’s unique culture, which would not go down too well with the
Pixar faithful, while the latter option could result in isolating Pixar from
Disney’s operations to an extent. This could alienate the smaller subsidiary
and create a significant disconnect. Also, the prospect of working with Steve
Jobs and accommodating his forceful personality was very intimidating for many
Disney executives. Keeping Pixar’s employees committed to Disney’s vision would
be challenging since many of them had contemplated resigning if Pixar were to
be acquired. This uniquely blended talent pool is Pixar’s core value and Disney
would be risking a mass exodus of talent.
Plan of Action
· Disney should allow Pixar a fair deal
of autonomy and protect its work culture as it is the main success factor of
Pixar. This can also be achieved structurally by treating Pixar as a separate
subsidiary of Disney.
· Disney must also retain the Pixar brand
in order to protect its distinct identity and to create a sense of association.
· Disney must accept a gradual
organizational shift to being more collaborative in order to foster smoother
integration with Pixar’s work environment. This will retain Pixar’s talented
employees and incentivize them to believe in the firm’s vision.
