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Disney & Pixar: M&A, Strategic Analysis Case (Harvard)

Technical Report · June 2018

DOI: 10.13140/RG.2.2.32707.30248

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 The Walt Disney Company and
Pixar, Inc.:
To acquire or not to acquire

Table of Contents
Introduction: ​3
Animation market share analysis and prominence: ​3
Overview of Disney’s strategic background with the regard in the viewpoint of Pixar: ​3
Overview of Pixar’s strategic background: ​4
Strategic merger and acquisition interpretations and assumptions: 5​
Strategic-Cooperative analysis of Disney’s and Pixar’s Relationship: 7​
Strategic Suggestions, recommendations and conclusion based on the above strategic merger and
acquisition analysis: ​7
Introduction:
This case study analyses and differentiates the merger and acquisition strategy for the companies
of Disney and Pixar, In the first section, you will find the brief analysis of the market share and
competitor overview of the Animation, production and CG industry . In the next two sections, the detailed
analysis of the companies Disney and Pixar are considered with respect to the acquisition regarding the
view of each firm respectively. The fourth section explains complimentary and counter-arguments and an
analysis of a strategic merger and acquisition proposal for each company respectively. The final section:
conclusion, interpretations, assumptions and suggestion showcase the final thoughts interpreted through
the strategic merger and acquisition analysis.

Animation market analysis and prominence:

With the evident box-office hits of animation and 3D-Computer graphic films namely Toy story,
Finding Nemo, there was a sudden competitive rise in the CG industry as a whole, production companies
fought internal battles in-order to dominant the market. Pixar was one of the top contenders in this
competitive market, followed by DreamWorks. Disney had a few box-office hits in 2D animation during
this period of 2D animations: like snow white, 1934; but, was struggling to keep up with the technological
computer rendering production studios, this is where the conflict arises and raised the argument: whether
Disney should acquire Pixar or not. With the event of having a limited 5-film partnership, is it in Disney’s
best interest to acquire Pixar? Will Pixar’s freedom and un-chained creativity fit and be complimentary to
Disney’s governance or will be do more harm than good? This is the present dilemma in this case-study:
Also, whether Disney has to acquire Pixar in-order to achieve competitive market advantage?

Overview of Disney’s strategic background with the regard in the viewpoint of Pixar:
Disney, being mostly recognized as a brand recognition and a market leader in animated film
productions due to its much reputed success in creating life-like memorable animated characters in film.
Disney’s intital success lied in the brand charater of “Mickey Mouse” created by founder: Walt
Disney.The continued success in 2D animated movies vested in snow-white, 1934; the little mermaid;
beauty and the beast; and the lion king, 1994 which alone has generated over $1 billion in net income for
the company.Disney though being immensely successful during the 2D animation era, struggled with the
technological advancement of the new 3D rendered compute animated film productions. In the struggling
of Disney, companies such as pixar, dreamworks captured most of the market share in CG Film
productions while diney lagged behind incrementally.
Disney spends a lot of its time in meetings, arguing, discussing and , having given renumeration
to the employess based on idea contribution: it promoted its creative thinking in a motivated level .The
governance of Disney after the release of the some of its most reputated films caused a more hierarchal
approach to move and film productions which caused the loss of creative idea enagement and diminished
the contributive attitude of its employess, while this was a minor cause of its decrementation; it had also
failed to catch up with the rise of technology which competitor and future-to be partner Pixar as
successfully embezzled. Most of its films after the lion king led to below-expected performance, but was
compensated with its entertainment reveue model, Disneyland, toys, home videos, etc. Disney’s board and
Eisner also had failed to realize Ketzenberg’s sugeestions in regard to the growing industry of CG films,
which led Ketzenberg to leave and create a powerful rival-competitor studio: Dreamworks.
Disney was losing its capability to deliver engaging, modern and 3D CG films and cinema, hence
has induced and proposed a deal with pixar for a 5-film co-operative contract: Disney had an idea to
utilize its brand value, revenue models and history to partner with Pixar’s modern and creative production
system to create excellent and adequate films to the industry.

Overview of Pixar’s strategic background:

Pixar is one of the few studios which has successfully broke into the animation market after snow
white release in 1937, It was an achievement by itself to secure consecutive box office hits, its first five
animation films grossed over $350 million each putting pixar into one of the market leaders in animation.
Due to the several reasons discusses here, Disney was competeively compelled to acquire pixar. By 2005,
Pixar has developed 100 films, 44 out of these won Oscars in visual effects with the credit going to
Renderman, with led to a total of 20 academy awards with prestige.It also had commercial success with
Overview of Pixar’s strategic background:

Pixar is one of the few studios which has successfully broke into the animation market after snow
white release in 1937, It was an achievement by itself to secure consecutive box office hits, its first five
animation films grossed over $350 million each putting pixar into one of the market leaders in animation.
Due to the several reasons discusses here, Disney was competeively compelled to acquire pixar. By 2005,
Pixar has developed 100 films, 44 out of these won Oscars in visual effects with the credit going to
Renderman, with led to a total of 20 academy awards with prestige.It also had commercial success with
many of its short films and commercials winning Oscars such as Tin toy, Geri’s Game.
Pixar had three propriety technologies : RenderMan, Marionette, and Ringmaster. Pixar has been a
powerful contender in the field of 3D animation productions in the film industry, one of the reasons for
it’s effective advantage is due to it’s lead in technology which promotes inclusive creation of the 3D
rendering which most of the market has no reach to for at least a few years.It was also claimed by
Founder, Steve jobs: “We have 10 years of proprietary software systems that you cannot buy anything
close to in the marketplace. You have to build them yourself.” Which adds to the fact that Pixar had
technology in that field which surpasses Disney in a intuitive manner. Pixar was built with a foundation of
Computer science, ex-disney employee George Lucas passionate for animation seeking betterment of the
industry, joined Steve jobs in 1986 and created Pixar. Though during the initialization pixar struggled
with funding and acquiring the technology to produce high CG films, they came to a stand as time passed.
Pixar’s self developed technology helped animators to manipulate thousands of motion control
points within a single character, this allowed the resuage of animated images, which saved an enourmous
amount of time, human resources and reduced the competitive pressure from from the market. This
allowed pixar to create some of the best grossing movies henceforth, namely Toy Story with a limited
staff of 110 when compared to other Animation studio staff strengths of 500 plus employess working on a
single film.This resulted to implement and characterize the saved time into focus of story development
and fine tuning the visual details, henceforth Disney saw a competitive advantage in acquiring pixar.

Strategic merger and acquisition interpretations and assumptions:

Pixer is a creative, open-end corporate environmental and extremely passioniate with its
animations and creations. Pixer operated on three princicples, “everyone must have freedom to
communicate with anyone”, “it must be safe for everyone to offer ideas”, and “stay close to innovations
happening the academic community”.Incoherently it was stated and remunerated during that time
“Lasseter was the only difference between Disney and Pixar”.
Robert Iger and many agree that, Animation is an integral part to Disney’s coporate strategy
because these animated characters complimented directly to the success of the theme parks and consumer
product divisions in accessories, home video, toys, brand value, etc of Disney as a whole.Such an
example is the evident popularity of Disneyland which was pushed through the saturation level due to the
immense world-wide popularity of Mickey mouse and other animated characters of Disney.
Pixer in the other hand had a proven track record for box-office hits especially in association with Disney.
In nay contrasted view, the control the synergy made sense.Many concluded that Disney and Pixer was a
perfect fit as they perfectly complimented each other in various ways, some even proclaimed that bring
Jobs and lasseter in the field will bring henceforth be equivalent to bringing back Walt Disney
himself.There was also an intriguing challenge point in the face of creativity and leadership, Steve jobs
was back as a the CEO of apple, the question was whether will pixar suffer with the low focus on pixar on
the behalf of steve jobs? What if both steve jobs and Lasseter left, Disney would be buying only
technogical resources.One of the most decisive reasons that pixer had been able to emerge as a leader in
animation and productions was due to the seer leadership and visions of the founders Steve jobs and
lesseter.In a counterargument, there is a possibility of Disney acquiring Pixar and indulging in a self-
depricating side form of Pixar in the coming years.
Similarly like for an example consider Disney’s merger and acquisition of Miramax was kept to a
side-panel and governed upon self-decision based constriction. Many argued that one of the compelling
reasons for the success of pixar is because of its freedom given to each and every employee and designer
to have a voice and contribute in a large-scale basis in the development of a project and movie.
Pixar had a fear that an acquisition and merger with Disney will hold its freedom and creativity to create
based on its core competences of creativity and rapid change and adaptation.From the rationalized point
of view of Deutsche bank analysts, Disney could as well as make 65 sequels to the Pixar hits under the
$6.5 billion purchase price.
Regarding the financial point of view, according to investment banking analysts: if Disney
purchased Pixar, the enterprise fee would be in the range of $6.5-$7.4 Billion. At that period, Pixar was
evaluated at $5.9 Billion market capitalization. Taking into account Disney’s previous acquisitions, they
would likely use an exchange of stock at a price of $7.5 Billion at a 2.3:1 Disney: Pixar share exchange
ratio.Credit Suisse valuated pixar ranging from 1.093:1 to 2.365:1, from pixar’s balance sheet.This meant
in the view of Disney, this acquisition is quite highly priced, which a projected price-to-earnings ratio for
pixar at 46. Where was Dreamworks, pixar’s closed competitor has a price-to-earning ratio of 30,
evaluated at $2.6 billion and revenues of nearly $1 billion.But, in an alternative point of view, the
acquisition of pixar may cause a heavy dilution with Disney at a trading P/E of 17.
Pixar had three propriety technologies : RenderMan, Marionette, and Ringmaster.In 1989, the
company sold the co-operative, license rights to Disney, Sony, lucasFilm and Dreamworks forming a
strategic competitive partnership with its competitors, which they utilized to create box-office hits such as
ratio.Credit Suisse valuated pixar ranging from 1.093:1 to 2.365:1, from pixar’s balance sheet.This meant
in the view of Disney, this acquisition is quite highly priced, which a projected price-to-earnings ratio for
pixar at 46. Where was Dreamworks, pixar’s closed competitor has a price-to-earning ratio of 30,
evaluated at $2.6 billion and revenues of nearly $1 billion.But, in an alternative point of view, the
acquisition of pixar may cause a heavy dilution with Disney at a trading P/E of 17.
Pixar had three propriety technologies : RenderMan, Marionette, and Ringmaster.In 1989, the
company sold the co-operative, license rights to Disney, Sony, lucasFilm and Dreamworks forming a
strategic competitive partnership with its competitors, which they utilized to create box-office hits such as
Jurassic Park.This was one of Pixar’s main source of revenue during the company’s early stage.
Pixar also created a part of its revenue using its graphical tools to create ads and commericals with coca-
cola, Listerine, etc until 1996.
Pixar’s had competitors as the CG market grew in the early decade of 2000, Pixar competed with
Fox, Sony, Lucasfilm, Dreamworks, MGM, Universal, Paramount and to an extent, even Disney.Pixar’s
most formidable rivals were Dreamworks, Katzenberg: the owner of the popular Shrek
Franchise.Katzenberg with its alternate : adult targeted animation movies such as shrek was a huge
success, which changed the view that animation movies are only to be for children.Dreamworks during
the years between 1998 and 2005, released several successful films: Antz, Shark Tale, Shrek 2, and
Madagascar.

Strategic-Cooperative analysis of Disney’s and Pixar’s Relationship:

Disney and pixar first collaborated with each other to create Computer Animated Production
Systems(CAPS), this relationship was enhanced due to the hit of Disney’s Rescuers Down Under and
Lion king. This proved that the strategic co-operation between these two studios created extraordinary
results, utilizing Disney’s storyboard and strategic Brand and Pixar’s high-end 3D-rendering tools and
productions.
Feature film agreement:
Disney and Pixar signed its first business contract in the production of feature films, where the owning
rights of movies belonged to Disney and the pixar was payed a participation fee based on the profits.
Co-production agreement:
The major agreement where, the company’s distributed profits inclusively to only movie productions
where pixar and Disney held 40% and 60% of the productions profits respectively. Disney also had
acquired 5% of the Pixar during its initial IPO which led to a more beneficial co-operation.
The co-production agreement also covered ancillary revenue streams of Home video, Television,
Licensing agreements, and Merchandise and games.
In 2002, pixar and Disney negotiated a deal where 100% of the ownership of the film goes to
pixar, where as the distribution fee was lowerd in favor or Disney. Finally, the deal was closed where
dieny got rights to pixar’s films and Pixar had the rights of any of the film’s sequels.
Eventually due to the flop- Disney produced sequels of hit series such as Cinderella, caused tension
between the two studios, which led to the demeanoring leave of pixar from Disney in the favor or other
potential host studios such as sony, Warner Brothers, and 20th Centuary Fox.
This was a huge loss especially in the context of Disney, which disambargled a change for exteme market
domination at early 2000.
Strategic Suggestions, recommendations and conclusion based on the above strategic merger and
acquisition analysis:
Agreeing with Bob Iger point of view in the brand value and recognition and its evasise evidence
that it has sustainable global recognition is not because of of the brand value of Disney but due to the
entertaining, life-like, heart-sunk characters which they embodied in their animated films, which allows
them to go to unrecognized places and create a global impact through its animation and films.
I believe pixar has the same vision intricately when regarding the context and views of Disney,
but differ in their exhuberent paths to achieve these desired results. In my review of this issue on whether
to merge Disney and Pixar, a partnership with continued and shared equity with the production costs
going to Disney and the for the cost of creation going to pixar, where the distributed profit structure
though may sound intimate and anxious in the present field of negotiation, But the action of Disney
acquiring Pixar would help in the long run bearing both the companies future prospects in mind for profit,
growth , and Impact will truly outshine its partnerships and help diverse in the global competitive market
of CG animation and 3D-render productions in film, but with only a few conditions will this certain phase
of action seem viable to the success of the merger.
The conditions are as follows:
• Merge the production entity of pixar and Disney into in single unit where the creation and
animation responisilbity mainly lies within Pixar and with minor-major contributions to story-
board is given by Disney to ensure co-operative competitive advantage over rivals like
Dreamworks, etc.
• No change of positions of direct leadership in pixar, jobs and lesseter should withhold maximum
capacity of leadership and decision while considering mutual discussion and co-operative
strategic planning with the leaders and board of Disney in regard to film quality production.
• Non-change of pixars three governing principles which has layed the foundation and fostered its
success: “everyone must have freedom to communicate with anyone”, “it must be safe for
everyone to offer ideas”, and “stay close to innovations happening the academic community”
 board is given by Disney to ensure co-operative competitive advantage over rivals like
Dreamworks, etc.
• No change of positions of direct leadership in pixar, jobs and lesseter should withhold maximum
capacity of leadership and decision while considering mutual discussion and co-operative
strategic planning with the leaders and board of Disney in regard to film quality production.
• Non-change of pixars three governing principles which has layed the foundation and fostered its
success: “everyone must have freedom to communicate with anyone”, “it must be safe for
everyone to offer ideas”, and “stay close to innovations happening the academic community”
• In regard to the financial prospects, considering a market cap evaluation of $7.1 billion along with
company stock inclusively based is a better option to reduce dilution of P/E of Disney.

Exhibit 1 Stock Price Comparisons ‘96–‘05 for Disney, Pixar, and SP500 (indexed at 100)

Exhibit 2 Disney/Pixar Deal

 Exhibit 2 Disney/Pixar Deal

Exhibit 3 Pixar Valuation Methods and Implied Exchange Ratios

Exhibit 4 Animated Film Performance by Studio as of November 2005 ($ millions)

 Exhibit 5 Walt Disney Company Business Segment Results ($ millions)

Exhibit 6 Aggregate Worldwide Performance of Pixar and DreamWorks Animation Movies

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