Case study

Subject : Merger of ‘Pixar Animation Studios’ with the ‘Walt Disney Company ‘

Merger Period : In Jan 2006 Walt Disney agreed to buy PIXAR for $7.4 Billion

History

Pixar was founded as the Graphics Group, one third of the Computer Division of
Lucasfilm that was launched in 1979 with the hiring of Edwin Catmull from the New
York Institute of Technology (NYIT). After years of remarkable research success, and
key milestones in films such as Star Trek II: The Wrath of Khan and Young Sherlock
Holmes, the group was purchased in 1986 by current Apple Computer, Inc. CEO Steve
Jobs after he left the company he founded with Steve Wozniak and Ronald Wayne. He
paid US$5 million to George Lucas and put US$5 million as capital into the company.
The sale reflected George Lucas' desire to stop the cash flow losses associated with his 7
year research projects associated with new entertainment technology tools, as well as his
company's new focus on creating entertainment products rather than tools. A contributing
factor was cash flow difficulties following Lucas' 1983 divorce from Marcia Lucas,
concurrent with the sudden drop off in revenues from Star Wars licenses following the
release of Return of the Jedi. Lucas also felt that a lot of the work being done by Pixar
was redundant, with Industrial Light and Magic doing similar work.

The newly independent company was headed by Dr. Edwin Catmull, President and CEO,
and Dr. Alvy Ray Smith, Executive Vice President and Director. Jobs served as
Chairman of the Board.

Initially, Pixar was a high-end hardware company whose core product was the Pixar
Image Computer, a system which was primarily sold to government agencies and the
medical community. One of the leading buyers of Pixar Image Computers was Disney
studios, which was using the device as part of their secretive CAPS project, using the
machine and custom software to migrate the laborious Ink and Paint part of the 2D
animation process to a more automated and thus efficient method. The Image Computer
never sold well. Though popularly believed otherwise, almost none of Pixar's famous
shorts were ever rendered on the Image Computer. Only a few select scenes from the
short Red's Dream were ever brought to final on the machine. Pixar employee John
Lasseter, who had long been creating short demonstration animations, such as Luxo Jr.,
premiered his creations at SIGGRAPH, the computer graphics industry's largest
convention, to great fanfare.

Business in transition

As poor sales of Pixar's computers threatened to put the company out of business,
Lasseter's animation department began producing computer-animated commercials for
outside companies. Early successes included campaigns for Tropicana, Listerine, and
LifeSavers. During this period, Pixar continued its relationship with Walt Disney Feature
Animation, a studio whose corporate parent would ultimately become its most important
partner. Pixar was a key technical participant in the development of Disney's CAPS, a
computer-assisted animation post-production software system. In 1991, after substantial
layoffs in the company's computer department, Pixar made a $26,000,000 deal with
Disney to produce computer-animated feature films, the first of which was Toy Story.
Pixar was re-incorporated on December 9, 1995.

Disney and Pixar

Pixar and Disney have had ongoing disagreements since the production of Toy Story 2.
Originally intended as a straight-to-video release (and thus not part of Pixar's five picture
deal), the film was upgraded to a theatrical release during production. Pixar demanded
that the film then be counted toward the five picture agreement, but Disney refused.

The arrangement was very profitable for both companies. Pixar's first five feature films
have collectively grossed more than $2.5 billion, equivalent to the highest per-film
average gross in the industry. Though profitable for both, Pixar later complained that the
arrangement was not equitable. Pixar was responsible for creation and production, while
Disney handled marketing and distribution. Profits and production costs were split 50-50
but Disney exclusively owned all story and sequel rights and also collected a distribution
fee. The lack of story and sequel rights were perhaps the most onerous to Pixar and set
the stage for a contentious relationship. However, others recognize that Pixar got the best
deal given that it lacked credibility as an animation studio, while Disney's own studios
were recognized as being at the top of the industry.

The two companies attempted to reach a new agreement in early 2004. The new deal
would be only for distribution, as Pixar intended to control production and own the
resulting film properties themselves. As part of any distribution agreement with Disney,
Pixar demanded control over films already in production under their old agreement,
including The Incredibles and Cars. More importantly, Pixar wanted complete financial
freedom; they wanted to finance their films on their own and collect 100 percent of the
profits, paying Disney only the 10 to 15 percent distribution fee. This was unacceptable
to Disney, but Pixar would not concede.

Bad blood between Pixar head Jobs and Disney Chairman and CEO Michael Eisner made
the negotiations more difficult than they otherwise might have been. They broke down
completely in mid-2004, with Jobs declaring that Pixar was actively seeking partners
other than Disney. However, Pixar did not enter in negotiations with other distributions,
since other partners saw Pixar's terms as too demanding. After a lengthy hiatus,
negotiations between the two companies resumed following the departure of Eisner from
Disney in September of 2005.

In preparation for potential fallout between Pixar and Disney, Jobs announced in late
2004 [1] that Pixar would no longer release movies at the Disney-dictated November
timeframe, but during the more lucrative early summer months. This would also allow
Pixar to release DVDs for their major releases during the Christmas shopping season. An
added benefit of delaying Cars was to extend the timeframe remaining on the Pixar-
Disney contract to see how things would play out between the two companies.

Pending the Disney acquisition of Pixar, the two companies created a distribution deal for
Pixar's intended 2007 release of Ratatouille, ensuring that if the acquisition plan had
fallen through for any reason, this one film would still be released through the Disney
distribution channels. Unlike the earlier Disney/Pixar deal, Ratatouille would have
adhered to Pixar's preferred ownership model, with Disney receiving only a fee for
distribution. With the completion of Disney's acquisition of Pixar, this deal is no longer
in force.

Disney's acquisition of Pixar

On January 24, 2006, Disney announced that it had agreed to buy Pixar for approximately
$7.4 billion in an all-stock deal. Following Pixar shareholder approval, the acquisition
was completed May 5, 2006. The transaction catapults Steve Jobs, who was the majority
shareholder of Pixar with 50.1%, to Disney's largest individual shareholder with 7% and
a new seat on its board of directors. Jobs' new Disney holdings outpace holdings
belonging to ex-CEO Eisner, the previous top shareholder who still held 1.7%, and
Disney Director Emeritus Roy E. Disney, whose criticisms of Eisner included the soured
Pixar relationship and accelerated his ouster, who held almost 1% of the corporation's
shares.

As part of the deal, John Lasseter, Pixar Executive Vice President and founder, became
Chief Creative Officer ( now reports to President and CEO Bob Iger and consults Disney
Director Roy E Disney) of the Disney and Pixar animation studios as well as the
Principal Creative Adviser at Walt Disney Imagineering, which designs and builds the
company's theme parks. Pixar President Ed Catmull became President of the Disney and
Pixar animation studios, reporting to Robert Iger and Dick Cook, chairman of Walt
Disney Studio Entertainment.

Lasseter and Catmull's oversight of both the Disney and Pixar studios does not mean that
the two studios are merging, however. In fact, additional conditions were laid out as part
of the deal to ensure that Pixar remains a separate entity, a concern that many analysts
had about the Disney deal.

Some other points of interest concerning the deal:

 • If Pixar had pulled out of the deal, they would have been required to pay Disney a
penalty of US$210 million.
• John Lasseter has the authority to approve films for both Disney and Pixar
studios, with Disney CEO Robert Iger and Disney Director Roy E. Disney
carrying final approving authority.
• The deal required that Pixar's primary directors and creative executives must also
join the combined company. This includes Andrew Stanton, Pete Docter, Brad
Bird, Bob Peterson, Brenda Chapman, Lee Unkrich, and Gary Rydstrom.
• There will be a steering committee that will oversee animation for both Disney
and Pixar studios, with a mission to maintain and spread the Pixar culture. This
committee will consist of Catmull, Lasseter, Jobs, Iger, Cook, and Tom Staggs.
They will meet at Pixar headquarters at least once every two months.
• Pixar HR policies will remain intact, including the lack of employment contracts.
• Ensures the Pixar name will continue, and that the studio will remain in its current
Emeryville, California location with the "Pixar" sign.
• Branding of films made post-merger will be "Disney Pixar" (starting with Cars)

Executive leadership

Steve Jobs continued to serve as Pixar's top executive until May 2006, when the company
merged with Disney. Today, Ed Catmull serves as president of the combined Disney-
Pixar animation studios, and John Lasseter serves as the studios' Chief Creative Officer.
Catmull reports to Walt Disney Company President & CEO Bob Iger as well as Walt
Disney Studios chairman Dick Cook. Lasseter, who has greenlight authority, reports to
Disney's President & CEO Bob Iger and consults with Disney Director Roy E Disney.

Questions:

What were the reasons for the merger of Pixar and Disney ?

What was the final outcome of the merger? Was it a win-win or a win-
lose situation ?
Solution1.

Reasons For Merger:

Synergies seen in combining successful animation experts and successful studios. ( Pixar
+ Walt Disney)

Weakness of Pixar in getting the required Capital

Merger in May 06 ensured that Disney got the tech built of Pixar.

Pixar maintained its identity and its own creative director is the Creative director and has
the authority to approve films for Disney - Pixar studios, the merged entity.

A steering committee formed to spread the Pixar culture. Pixar sign and name / HR
policies continues.

Branding of films post merger – Disney Pixar

Solution 2.

Outcome/Conclusion

Win-Win deal - The strength of pixar animation was supported by the money of Disney
and made it a force to reckon with and successful. For Disney it was a adding muscle to
its existing animation strength with a stronger partner.

Merged Entity: Disney Pixar