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Case Sample (Disney Pixar)
Case Sample (Disney Pixar)
Case Sample (Disney Pixar)
Disney.Pixer
EXECUTIVE SUMMARY
For its creativity in the animation business, since 1991, Disney chose Pixar to become partner
and had had a 3 in-a-row movie contract. One of the movie, Toy Story, by Disney-Pixar made
a tremendous success in the Box office and made a revenue of more than US$350 million. Since,
then Disney-Pixar combination was thought to be Bringing back Walt Himself! And Disney
had to depend on the characters and revenue generated by the partner Pixar. But as the exiting
co-production agreements was about to expire in 2006, Disney was in dilemma about the future
action. . In this baffling situation, would it be a wise move by Disney to acquire Pixar with a cost
around $7.4 billion is the main is the main theme of this case study.
Careful observation of this case gives several problem area for Disney-Pixar acquisition
dilemma. For example, from financial management perspective, the question was- does is make
sense to spend such amount for acquisition? And is the dilution is acceptable by the existing
shareholders? and the recommendation for this question is if the company only consider the
NPV figure then the obvious decision would be not to acquire Pixar because NPV of the
acquisition is negative i.e. -$.5 million considering only the financial gains. But NPV can ignore
some synergy effect like marketing gains, strategic benefits, monopoly power which can be
acquired through acquisition. Moreover, technology transfer through acquiring Pixar will be a
milestone for Disney. So if we consider those synergy effect, then Disney can acquire Pixar.
However, exercise dilution wont be an issue if synergy effect overpass dilution effect.
Moreover, HRM department was in needs of solution regarding team effectiveness and the
recondition according to analysis is Disney should follow the Belbins model. And roles
should be distributed in such way so that same weakness could not affect the whole team. As for
differentiation strategy Disney should follow the combination of cost and differentiation strategy.
TABLE OF CONTENTS
Executive Summary ........................................................................................................................ 2
Table of contents ............................................................................................................................. 3
Chapter 1 ......................................................................................................................................... 6
1.1
Case Background.............................................................................................................. 6
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CHAPTER 1
1.1 CASE BACKGROUND
Because of the technological advancement in the animation industry through the innovation of
CG (Computer Generated) technology which enabled to supersede the hand drawn animation
rapidly, animation movie business found a new window of opportunity to make outsized profit
with a very low cost, time requirements and also gave the animator a high flexibility to animate.
Pixar, a creative name in the animation movie business, leaded this High tech opportunity as they
had just inaugurated this technology by the year 2005 throughout the world. On the other hand,
Disney, a giant name in the animation industry, was struggling hard to get a clench on CG
(Computer Generated) technology which was the competitive advantage of Pixar over its rivalry.
For its creativity in the animation business, since 1991, Disney chose Pixar to become partner
and had had a 3 in-a-row movie contract. One of the movie, Toy Story, by Disney-Pixar made
a tremendous success in the Box office and made a revenue of more than US$350 million. Since,
then Disney-Pixar combination was thought to be Bringing back Walt Himself! And Disney
had to depend on the characters and revenue generated by the partner Pixar. But as the exiting
co-production agreements was about to expire in 2006, Disney was in dilemma about the future
action. The competition in the animation industry become fierce as numbers of giant competitors
like Warner Bros, DreamWorks, Fox, Sony were coming into the way because technology was
advancing and entry barrier was losing because of the easy access to new technology. In this
baffling situation, would it be a wise move by Disney to acquire Pixar with a cost around $7.4
billion is the main is the main theme of this case study. There are can be so many positive effect
of acquisition like shared activities, shared resources and increased industry attractiveness along
with the negative effect of acquisition like cultural clash, stock dilution etc. Given this dilemma,
big question standing in front of Disney is whether to acquire Pixar or not!
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CHAPTER 2
2.1 CASE BRIEF
New Management and excessive bureaucracy
Katzenberg who was famous for his roaring passion, ethics and devotion for animation and had
also a dream to escalate Disney to its former glory, Disneys performance started to decline as he
inaugurated the rival- DreamWorks in 1997. In 2005 Robert Iger was promoted to CEO of the
Walt Disney (Euro Monitor, 2004).
The fall of Disney Kingdomthe main problem in Disneys operation started from the mid of
2002 when earnings started to decline, shareholders were fleeing and a major lawsuit against
Disney regarding Winnie-the-Pooh happened. In 2003 another turmoil happened as Roy Disney,
nephew of Walt Disney, resigned from the board and complained about the Eisners management
style, reticence in investing decision, vague succession plan as well as a creative brain drain.
Most portion of the shareholders were struggling to get Eisner out of the chair. On the other
hand, the strategic business partners, Miramax and Pixar, were unsatisfied about their negligence
and unfair treatment of Eisner. Eisner followed the excessive filtering process as well as
approval process was bureaucratic (Times magazine, 2004). These strict rules and regulations
affected the creativity of Disneys employees to bloom. After a lots of straggle, at last, in January
2005 Eisner agreed to stand down. Soon after the walk out of Eisner, In 2005 Robert Iger was
promoted to CEO of the Walt Disney. After the change in leadership everybody was thinking
about the new rise of Disney. Robert Iger believed that- to be successful in the animation
business, CG technology needed to be emphasized. So, Disney was struggling hard to get a
clench on CG (Computer Generated) technology which was the competitive advantage of Pixar
over its rivalry. For its creativity in the animation business, since 1991, Disney chose Pixar to
become partner and had had a 3 in-a-row movie contract (Disney, 1990).
Excessive Dependency on Pixar for revenue and CG technologyWhen Robert Iger was the
chief, Disneys was mostly depended on the revenue and characters generated by its partner
Pixar. Because of the technological advancement in the animation industry through the
innovation of CG (Computer Generated) technology in 2005 which enabled to supersede the
hand drawn animation rapidly, animation movie business found a new window of opportunity to
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make outsized profit with a very low cost, time requirements and also gave the animator a high
flexibility to animate. Pixar, a creative name in the animation movie business, leads this High
tech opportunity as they had just inaugurated this technology by the year 2005 throughout the
world. Astounded by Pixars creativity, Robert Iger turned his attention toward Pixar deeply as
Pixar was able to produce such successful movie as Toy Story and Finding Nemo etc. One
of the movie, Toy Story, by Disney-Pixar made a tremendous success in the Box office and
made a revenue of more than US$350 million. Since, then Disney-Pixar combination was
thought to be Bringing back Walt Himself! But lots of turmoil happed in the last four years.
The Rising competition and Pixar dilemma of acquisition the competition in the animation
industry became fierce as numbers of giant competitors like Warner Bros, DreamWorks, Fox,
and Sony were coming into the way because technology was advancing and entry barrier was
losing because of the easy access to new technology. In this baffling situation, would it be a wise
move by Disney to acquire Pixar with a cost around $7.4 billion is the main is the main theme of
this case study (Martin, 2003). There are can be so many positive effect of acquisition like shared
activities, shared resources and increased industry attractiveness along with the negative effect of
acquisition like cultural clash, stock dilution etc. Given this dilemma, big question standing in
front of Disney is whether to acquire Pixar or not! This research paper will try to find out the
answer of the question- Is there any enthralling reasons for Disney to acquire Pixar?
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CHAPTER 3
Based on three major area namely financial management, Human Resource Management (HRM)
and International Business (IB), the problem of Disney Pixar dilemma will be explained in this
chapter with the help of different model.
3.1 FINANCIAL MANAGEMENT
The objective Regarding Financial management would be to find out the logical explanation in
favor of acquisition and against the acquisition. For this purpose some logical related theories
and model will be given in the following section along with criticism.
3.1.1 MM (Modigliani-Miller) propositions
Disneys major problem spins around acquiring Pixar and huge cost concerning the acquisition.
And as for financing this huge amount Disney thought of new equity issue as well as bank loan.
But how much the proportion of debt and equity will be is the main concerning issues at present.
With the help of MM propositions Disney can find the correct financing sources.
Recard (2012) argued against this proposition as the model does not consider the transaction
cost. Moreover, Stewart C. (2008) also did not support this model as this model has unrealistic
assumption about the borrowing rate. But Ross (2013) and Westerfield (2013) support this model
because of the best possible correct assumption.
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Hill (2010) argued that BSC model is not a rational model because the model does not explain
the dimension precisely. Moreover, Martin (2012) also criticized this model by raising an issue
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regarding the usage. But Westerfield (2011) was very optimistic about this model and showed in
his model that BSC has realistic assumption by challenging the objection of Hill (2010).
3.2 HUMAN RESOURCE MANAGEMENT (HRM)
From the Human Resource Management
possible post team effectiveness of Pixar team and the importance of their existence in Disney.
Following model will be helpful to solve the Disney dilemma.
3.2.1 Belbins Team Roles Model
Disney currently could not cream out the best performance of the team because of their
bureaucratic human management system. Creativity is the main strength of the film industry and
Disney is unable to give the opportunity to the employees to express their creative thinking.
Belbin (2015) model will be real help in this case because this model categorizes the team roles
into different subcategories so that the team will not be affected by same weakness or same
strength which is very helpful to cream out the best team performance (Bilbin.com, 2013). There
are three major categories in this model namely thinking, people and action oriented categories.
Under thinking categories 3 roles will be included namely monitor evaluator, plant and
specialist. Under people category three other roles will be included namely coordinator, resource
investigator and team work.
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Farsemen (2009) and Zhang Lei (2012) argued that this model does not cover all the aspects of
the team effectiveness. But Mr. Krimth (2005) gives a very positive view about this model and
explained via an empirical analysis.
3.2.2 Human Resource (HR) Score Card
As Disney is in trouble to get the best output of the employees, the company could not get the
proper profit trend from their operation. HR score card will be helpful in this regard because this
model will give the specific goal to specific department to achieve for which individual
employee will be accountable (Martin, 2012). Moreover, this model also helps to achieve the
proper expertise in job section and employer will arrange for career development session for the
employees.
Halt (2012) and Martin (2008) argued about this model by questing the dimension of this model
and they suggest other three dimension besides HR original mode. But Kethrin (2009) explained
that individual goal assignment will be helpful to cream out the best performance of the
company.
3.2.1 Six Sigma Model
Increased number of dummy were tested in the previous year by Disney team but no proper idea
was found to incorporate in real movie. As a result, wastage cost increased dramatically. Six
sigma model introduced by Motorola in 1986 will be effective to solve this problem regarding
the HRM management. Under six sigma model, 6 different measures will be introduced and thus
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wastage cost can be reduced to certain level. Define, measure, analyze, control and improve are
the 6 dimensions to resolve the HR dilemma.
Joseph M. Juran (1996) questioned about the dimensions of this model by explaining the
effectiveness of this mode. But But Geoff (2001) and Bruce (2005) were gives positive opinion
about this model and explained the real scenario of Motorola.
3.3 INTERNATIONAL BUSINESS MANAGEMENT
The objective regarding international business would be to find out the current international
business strategy to differentiate from the international competitors. Different model will be
explained in this section by explaining different theories therein.
3.3.1 Integration/ Responsiveness Grid Model
Because of the global fierce competition, Disney needs is in problem of choosing the right
globalization strategy (Besley, 2005). Currently the company is using the international strategy
but at present the pressure from the local area and pressure from cost both are high for Disney.
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So the company needs a very precise globalization strategy which is Transitional Strategy.
Transitional strategy is proper because both cost pressure and local pressure is high for Disney.
3.3.2 Risk reward analysis
In Disney, both monetary and non-monetary motivation is very low for the employees. As a
result the companies were not getting the correct output from the employees (Brown, 2004).
Risk reward analysis will help to resolve the dilemma by giving the correct combination of
reward against the taken risk. Moreover, this model will helps to build up the self-confident of
the employees.
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CHAPTER 5
In the previous two chapter i.e. 4 & 5 several problems are identified based on the current
situation of Disney on the context of financial management, Human Resource Management and
International Business. This chapter will try to give alternate solution along with the best fit
option and action plan accordingly.
5.1 ALTERNATE SOLUTION 1 [BEST FIT SOLUTION]
In this section alternate solution and recommendation will be given based on the sub problem
analysis done in section 4.1
5.1.1 Regarding Financial Problem
Whether the acquisition causes a positive effect on a company depends on the sources of synergy
from acquisition. Disney can acquire Pixar if revenue is enhanced through marketing gains or
strategic benefits or monopoly power. Moreover, if cost is reduced through economy of scale or
economy of vertical integration or technology transfer or contemporary resources or through
elimination of inefficient management, then Disney can acquire Pixar. Financial gain like tax
gain through unused debt capacity usage or usage of tax losses or usage of surplus fund can
motivate the acquisition. However, from the analysis it was found that NPV of the acquisition is
negative i.e. -$.5 million considering only the financial gains. And most importantly, as the
investment bank reported, the purchase cost of this acquisition would be between $6.5 billion to
$7.4 billion. Exchange ratio of stock was expected to be 2.3:1 (Disney: Pixar). This high cost of
acquisition will dilute the stock excessively as the current P/E of Pixar is 46 while Disney has
only a P/E of 16.
Recommendation: if the company only consider the NPV figure then the obvious decision
would be not to acquire Pixar because NPV of the acquisition is negative i.e. -$.5 million
considering only the financial gains. But NPV can ignore some synergy effect like marketing
gains, strategic benefits, monopoly power which can be acquired through acquisition. Moreover,
technology transfer through acquiring Pixar will be a milestone for Disney. So if we consider
those synergy effect, then Disney can acquire Pixar. However, exercise dilution wont be an
issue if synergy effect overpass dilution effect.
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CONCLUSION
Because of its creativity in the animation business, since 1991, Disney chose Pixar to become
partner and had had a 3 in-a-row movie contract. One of the movie, Toy Story, by DisneyPixar made a tremendous success in the Box office and made a revenue of more than US$350
million. Since, then Disney-Pixar combination was thought to be Bringing back Walt Himself!
And Disney had to depend on the characters and revenue generated by the partner Pixar. But
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recently because the management is considering to acquire Pixar. The whole report was devoted
to find this answer. And based on NPV, the answer is yes.
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