UNIVERSITAS INDONESIA

THE WALT DISNEY COMPANY & PIXAR INC.

To Acquire or Not to Acquire?
CASE STUDY

Subject: International Strategic Management

Lecturer: Alberto D. Hanani

By:
Kevin Juan. (1606938435)

MAGISTER MANAGEMENT
FACULTY OF ECONOMY AND BUSINESS
UNIVERSITY OF INDONESIA
NOVEMBER 2017
A. List of Available Decisions/Options for Walt Disney & Pixar
WALT DISNEY
Options Positive
Have a binding power to both parties, if
properly & legally formed
Easier to disengage / discontinue the
deal if the relationship is proven to be
ineffective
Provide a clear (especially a written
contract) list & level of quality in
Extending related products and services
1 Contractual
Relationship
A quicker solution to gain required
capabilities (in animation field for
instance) and to gain external insights
(Pixars work culture and technology
excellence for instances)
Hiring
Reducing possible efforts & hassles in
2 Pixars
developing talents from initial stage
Experts
Pixars talents might be easier to be
recruited using higher salary or bigger
career opportunity lures/baits
Fixing the Could easily provide a long-term
Problem solution
Internally Providing more opportunities to retain
3
(Build a CG the internal talents (as Disney interacts
Animation with them longer than external talents)
Division) and less adaptability time
Negative
Cost money, time, & efforts to form &
review every time it gets renewed
Unable to list & cover every possibility,
which may occur in the future, within a
single contract while the amount of pages
could easily grow bigger & bigger over
the time (every time the contract is
renewed)
Contract could also, unfortunately, limit
or reduce adaptability to a dynamic
market environment
If Disney choose to rely on contracts,
Pixar may use the relationship to buy
them a sufficient time to build their own
(internal) distribution channel and finally
cutting off relationship with Disney
completely
Need longer adaptation time (such as time
to identify firms internal condition or to
adapt with different culture or working
environment gap)
There is a possibility of demotivating
these newly-hired experts due to a lack of
better talent management capability
Bearing a risk of hiring experts with short-
term (transactional) perspective or
pecuniary motives (for instance, other
competitors may offer a better deal than
Disneys)
Needs more organizational resources and
efforts to develop this solution internally
(screening the candidates, hiring the
talents, and training them)
Takes longer to realize the ideal form and
reap the benefits (due to being a long-term
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 Easier to control and manage according solution) yet Disney does not have the
to Disneys own requirements luxury of time as the contractual
agreement were nearing its expiration
Preventing Disney from acquiring
external (outside Disney) perspective (a
chance to do benchmarking or to acquire
best practices from ex-Pixar employees
experiences)
Opportunity to takeover strategically fit Requires the biggest (most expensive)
business & capability (CG animation upfront cost to realize it (be it in monetary
division) relatively quicker or non-monetary cost)
Provides the firm with external There is chance of provoking a talent
experts/talents which are better than exodus out of Pixar
Disneys current ones & have fresh Cultural barriers (due to distinctive
perspectives cultures) and longer adaptability time
Ushers in insights on how to create a required by Pixars people
better working environment and Loss of occupations for the previous
disseminate it within Disney relatively employees of Disneys animation division
quicker (as long as Disney could retain (disengagement/layoffs additional
Pixars people) expense)
Reducing risk compared to a decision If managed poorly, especially in post-
to build internally (which is a long-term M&A period, may generate diseconomies
Proceeding solution, yet Disney has to decide of scale and negative synergy (e.g.
4
with M&A quickly) demotivated people)
Preventing the requirement of In the case of stock/equity-based
allocating a series of fund injection on acquisition, Jobs may become one of the
an unproven resource/capability (e.g. biggest owners with an exercisable right
Disneys internal CG division) and to steer Disneys direction (this could
shifting the funding, instead, to the pose a problem as Jobs is deemed as a
well-proven Pixar selfish or uncooperative person)
Securing the main revenue stream from A huge probability of facing Pixars
any potential uncertainties (such as attempt in setting an overvalued
increasing instances of contract transaction price/deal (as it holds a bigger
renegotiation in the future, as Pixar bargaining power relative to Disney)
gains more bargaining power, or
allowing Pixar to buy the time in
developing their own distribution
networks)

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 PIXAR
Options Positive
Have a binding power to both parties, if
properly & legally formed
Easier to disengage / discontinue the
deal if the relationship is proven to be
ineffective
Provide a clear (especially a written
contract) list & level of quality in
Extending
related products and services
1 Contractual
Relationship
Could easily provide a long-term
solution
Providing more opportunities to retain
Fixing the
the internal talents (as Disney interacts
Problem
with them longer than external talents)
Internally
and less adaptability time
2 (Building
Easier to control and manage according
Sales &
to Disneys own requirements
Distribution
Channels)
Address Pixars interests effectively &
in a relatively cheaper means
Finding & Renewable feature of contract could
Negotiating allow Pixar to adjust its demands
3 Better within a contract
Contract Enabling more chances and time for
Terms Pixar to reconsider & planning its
second option (i.e. internally building
sales & distribution channels)
Negative
Cost money, time, & efforts to form &
review every time it gets renewed
Unable to list & cover every possibility,
which may occur in the future, within a
single contract while the amount of pages
could easily grow bigger & bigger over
the time (every time the contract is
renewed)
Contract could also, unfortunately, limit
or reduce adaptability to a dynamic
market environment
The terms have been unfavorable to
Pixars interest (as they have more
bargaining power in creating top-notch
animation movies, but have generated
non-proportional profits out of them)
Needs more organizational resources and
efforts to develop this solution internally
(screening the candidates, hiring the
talents, and training them)
Takes longer to realize the ideal form and
reap the benefits (due to being a long-term
solution)
Preventing Disney from acquiring
external (outside Disney) perspective (a
chance to do benchmarking or to acquire
best practices from ex-Pixar employees
experiences)
Cost money, time, & efforts to form &
review every time it gets renewed
Unable to list & cover every possibility,
which may occur in the future, within a
single contract while the amount of pages
could easily grow bigger & bigger over
the time (every time the contract is
renewed)
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 Pixars shareholders could retain its Contract could also, unfortunately, limit
stakes without sacrificing their or reduce adaptability to a dynamic
ownership rights (independency) in market environment
directing the company Harder to realize as Disney has become
used to the olden days contract terms
Opportunity to earn overvalued Quite hard to exploit the buyer in setting
compensations as much as possible, the highest transaction price (exploiting
especially when Pixar has realized it the overvalue concept in maximum)
holds a higher bargaining power As the deal will most likely be conducted
Provides the firm with a dependable in equity-based transaction, Pixars
solution in providing sales & shareholders may face a dilutive wealth
distribution channels scenario, in the form of lower or even
Luring in Preventing the requirement of heavy negative growth of capital gain (as a
Candidates fund-raising decisions to finance the dyssynergy happened instead)
4
for M&A firms organic growth (e.g. Pixars There is chance of provoking a talent
Opportunity internal sales & distribution networks) exodus out of Pixar
Cultural barriers (due to distinctive
cultures) and longer adaptability time
required by Pixars people
If managed poorly, especially in post-
M&A period, may generate diseconomies
of scale and negative synergy (e.g.
demotivated people)

WACC in 2004 --> [{1220000000 / (1275000000)} (0%) + {54900000 /

(1275000000)} (2.77%) (1-35%)] = 0.078%

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 Incremental (from purchasing Pixar) Net OCF in 2004 (as a minimum threshold in
estimating future OCF) --> $ 270 million
Incremental Discounted OCF (r = 2004s WACC) in Jan 2005 (estimation for at least 15
years ahead) equals to 2004s Cash & Marketable Securities added by the total sum of OCF
until 2020 --> $ 1040000000 + $ 4050000000 = $ 5090000000 (this figure means
that, at least, Disney could earn around $5 billion in 15 years by purchasing Pixar)
Incremental NPV in 2004 --> $ 5090000000 - $ 7500000000 = $ (2410000000) --
> Negative NPV in M&A Decision (Option 4)
Disneys OCF, in comparison, while maintaining old (1997 contract) contractual
relationship with Pixar, had never dropped below $2 billion in the last 5 years (2000-
2004).
In conclusion, an exclusive relationship (instead of relationship termination) will still
generate greater value for both companies (Disney & Pixar).

B. 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)?

Disney faces difficult decision regarding its relationship with Pixar whether to acquire
Pixar or continuing in an exclusive relationship. Should Disney acquire Pixar, Disney will have
to reach up to $7.4 billions from its pocket to attain full ownership of Pixar which the only
possible way is through the exchange of stocks. But should Disney not acquire Pixar, Disney
might hurt from the downfall of its animation industry and in the worst case other company
such was Warner Bros, Dreamworks, etc may be the one who purchase it and Disney will lose
its one of the best opportunities ever.

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 Some essential capabilities that Pixar possesses include technological advancement, such
as its 3D leadership in computer animation. Pixar owns a number of programs and software
such as Rendermann, Marinotte, and Ringmaster, which are all considered top of the line and
state of the art. Pixar is also made up of a group of very skilled staff with creativity and idea to
enrich the industry. Pixar capitalizes on the importance of its people, and offers a highly
cooperative environment for its employees. The company make sure that people have the
freedom to communicate, and the sharing of individual ideas is highly encouraged.

While Disney just started developing its own computer animation films, Pixar already
made billions of dollars. The acquisition would allow Disney access to Pixars exclusive
technology. On the top of that, revenues would increase through the merging. This will help
Disney attract new customers and generate of revenues from high-quality and new innovative
types of films. Disneys merchandise sales and theme park ticket might also increase from this.

From my point of view analysis and consideration, the final decision that I recommend
Disney to get full acquisition of Pixar. I believe that this is the best option considering the
amount of value and talent that Pixar would bring into the company as the leader in the
computer generated animation industry. Through Pixar history of success that collaborations
brought, it is easy to realize that the relationship with Pixar is a valuable resource that Disney
should not risk damaging. From this merging, Disney would receive access to Pixars top of
the line technologic software and talented human resource, while on the other hand Pixar would
benefit from Disneys access to funding, capabilities to produce merchandise, and distribution
channels. The other option contain important flaw which bringing potential threat to Disney in
the case that Pixar partners or in the worst case fully acquired by other competitor.

C. If Disney does acquire Pixar, how should Robert Iger and his team
organize and manage the combined entity? What challenges do you foresee,
and how would you meet them?

The huge issue needs to be dealt (by Disney) immediately, will be about Steve Jobs, the
charismatic man, himself. It is best for Disney not to buy Jobs whole ownership shares to
ensure the shareholders & investors (also the public) that Jobs influence will somehow remain
and influence the new Pixar. This decision could also suggest the company and its
shareholders that, albeit being majorly owned by Disney, Pixar will still be completely able to
retain and, more importantly, exercise its rights as legal entity (i.e. will still strive and endeavor

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to provide capital return for its original Pixar shareholders). This is the precise role
designated to Steve Jobs and his presence as one of the significant shareholders (i.e.
significantly giving direction to the new Pixar).

Secondly, ensuring and communicating with Pixars employee that its high-performance
culture, collaborative environment, & the previous executives (such as Edwin Catmull & John
Lasseter) would stay and run the company, and that includes Steve Jobs (as aforementioned).
This is a significant decision to reduce or even eliminate the talent exodus from Pixar. The
existing talents within Pixar will be ensured and confident that their familiar working
environment, which is (albeit slightly influenced by Disney, such as The Dailies practice)
more supportive in developing and maintaining high quality standard (better than Disneys
decision to release low-cost movie The Tigger Movie just for the sake of bottom-line), will
prevail in the new Pixar.

Lastly, yet possibly more important, assigning a short-term responsibility team to serve as a
bridge in connecting and aligning Pixar with Disney. This enables the exchange process of
specialized expertise & resources between parent company and subsidiary, hence expediting
the integration process through the accommodation of strategic fits in the strategical
perspective. Other type of practices includes incorporating the particular superior activities
(Pixars CG excellence and collaborative working culture) within the aggregate supply chain
network, and also exploiting the superior brand name and its legacy power (particularly Disney
brand) in creating business performance synergies.

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Reference:

http://tomatoes-craig.blogspot.co.id/2014/03/case-analysis-walt-disney-company-and.html

http://getfilings.com/comp/k0001001039.html

http://getfilings.com/comp/k0001002114.html

http://getfilings.com/o0000950129-04-009716.html

http://getfilings.com/o0001193125-05-054111.html

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