Case Analysis - The Walt Disney Company and Pixar Incorporated: To

Acquire or Not to Acquire

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 Pixars success. Pixar created a flat
and flexible organization that gave more autonomy to the firms artists. Walt Disney
was the frontrunner of animated childrens 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, Disneys 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 childrens 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 Pixars 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 Disneys price-to-earning (P/E) ratio
was 17 while Pixars 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 industrys history, grossing over $350 million in their first
three movies between 1995 and 1998. Between 98 and 04, Pixar contributed to 10%
of Disneys 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 Pixars
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 Disneys 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 Pixars
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
Disneys 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 Pixars 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 Disneys 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 Jobs 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 Disneys corporate strategy since Disney-Pixar joint
movies have achieved the highest revenues and have contributed the most to
Disneys 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. Disneys 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 Disneys 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 Pixars unique culture,
which would not go down too well with the Pixar faithful, while the latter option
could result in isolating Pixar from Disneys 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 Pixars employees committed to
Disneys vision would be challenging since many of them had contemplated
resigning if Pixar were to be acquired. This uniquely blended talent pool is Pixars
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 Pixars work environment. This will retain Pixars
talented employees and incentivize them to believe in the firms vision.
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