Caneve Omar 832451

Cocchiglia Roberta 832574

Costantini Croce Roberta 832112
Pletea Elena 832662
Sartorato Brigitta 835280
Tognoli Filippo 832596
Zitelli Francesco 832310

[THE WALT DISNEY COMPANY

& PIXAR INC: TO ACQUIRE OR
NOT TO ACQUIRE?]
1. Which is greater: the value of Pixar and Disney in an exclusive relationship, or the sum
of the value that each could create if they operated independently of one another or were
allowed to form relationships with other companies? Why?

In order to understand whether or not the joint value of the two firms is higher than the sum of
the two taken separately, we need to perform a complete SWOT analysis, that is shown in
Exhibit 1 for Disney and in Exhibit 2 for Pixar. Without lingering over the analysis of each
single SWOT, lets focus on the match of the two SWOTs, where we highlighted that
weaknesses of one firm are covered by the strengths of the other and vice versa. As it is evident
from Exhibits 3 and 4, Pixar seems to be the engine for the new success of Walt Disney: this is
mainly due to its new ideas and cost effective and unique ability at producing CG films -
something that Walt Disney had been missing since the release of The Lion King. On the other
side, Walt Disney provided Pixar with important financial funds, a strong brand name -
worldwide recognized, able to boast consumer loyalty - and a diversified portfolio (from
entertainment parks to books production, TV channels and home-video). With just a simple
contract, at the beginning of its history, Pixar was able to make itself and its characters known
worldwide.
Having proved such strict reciprocal relationship between Disney and Pixar, the fit must be
considered in light of the environment the two firms were facing at the 90s and thereafter. Both
firms were facing the opportunity given by the new and innovative CG market. In particular,
Walt Disney was looking forward to maintain its power and dominance throughout time and
environment changes, while Pixar was facing the chance to get advantage of its previous
business (computer hardware and software) to build up a primacy in CG films. In a certain way,
therefore, the opportunity was the same for both firms: being the leader in the new market.
Moreover both firms were threatened by competition in their own markets and by the risks
related to the new one. Hence that was the point: on one hand, Walt Disney needed an innovative
partner to take again to the film field as a leader; Pixar, instead, needed a strong partner that
facilitated its escalation, gave it prestige and financial support. Whats more, given the film
market environment, to pursue its objectives, Walt Disney needed expressly a new young
partner, not so powerful at least at its beginnings: nor DreamWorks nor 20th Century Fox nor
Warner Bros could be potential partners because of their well-known rivalry with Disney.
Meanwhile, Pixar, as a new entrant, was looking for the most successful and the most powerful
partner in order to start its new business in the most effective way and thus lowering the risk.
Therefore that is why an exclusive relationship between Pixar and Walt Disney was
recommended against any other exclusive relationship with other partners.
All the analysis just considered can be rephrased under the Better-off test to demonstrate the
added value from this exclusive relationship:
- industry attractiveness: from Walt Disneys point of view, given the change in the film market
and its incapacity at successfully and cost-effectively producing CG films, the threat of new
competitors could be mitigated by broadening its scope and entering into a deal with someone
who was efficient and successful at creating CG films from a technical point of view - in this
2
sense the industry in which Pixar operated was attractive to Walt Disney; for what concerns
Pixar, instead, the new emerging CG film market could have helped the firm on escaping from
the large competition in computer hardware and software market and taking advantage of its
knowledge to beat the competition in the new film market and gaining new revenues;
- competitive advantage: with regards to Disney, Pixar constituted a source of cost advantage
since, by entering a deal with it, it could have benefited from its cost efficiency; Pixar, instead,
under the umbrella of Disney brand, could have taken advantage of the willingness-to-pay from
consumers;
- risk considerations: both firms were facing the threat to succumb in their market and precisely
Disney in the CG film one and Pixar in the software and hardware one. By diversifying and
entering the new CG market, both firms can share the revenues across the two businesses.
2. 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)?

Assessing this question requires to understand and compare the transaction costs occurred in an
acquisition against the costs generated by any other type of contract (e.g.: alliance, joint-venture,
etc.). Any form of contract, in fact, leads to some costs: an acquisition requires a consistent lump
sum and thereafter integration and organizational costs; long-term contracts instead might lack of
precision and completeness, leaving room for opportunistic behaviors.
In the specific case of Walt Disney and Pixar, being their exclusive relationship valuable, an
acquisition could be better than any other type of contract. To sustain this assertion, we will use
the Best-Alternative test which relies on transaction costs analysis.
Looking at their joint history, we can reasonably infer that, starting from their first agreement in
1991, Walt Disney had the chance to test year by year both the actual potential, strengths and
weaknesses of that question mark (Pixar) and the actual attractiveness of the emerging new CG
film market which was far from the graphic hand-drawn market in which Walt Disney was born
and dominated. Eventually the new market marked its primacy over the old one (as it can be seen
in Exhibit 5, in the 2000s all CG films, whatever was the producer, registered higher revenues
than CG films) and Pixar gave proof, for sure, of its great capacities and added value with
respect to the competitors. The success signed by Pixar over those years had increased its market
power, consequently: its total box revenues were higher than those of Walt Disney and any other
competitors, and so Pixar stocks were performing above not only Walt Disney but also the
average market trend (statistics given by SP500) (see Exhibits 6 ). The greatest evidence of
Pixars growing and important market power was given by the fact that: on one side, in 2004
Pixar was looking for another partner than Walt Disney, and, on the other side, by joining any
other contract, Pixar was intentioned to gain all the major possible profits and not just a small
fraction as it had been since then with Disney. Pixar was actually leading the game: everyone
would like to work in partnership with Pixar and, eventually, Pixar needed a marginal partner
which sustained it.

3
Therefore, after 2004, on the part of both Walt Disney and Pixar, entering into a new contract
would not be cost saving: the positions of the two firms were too strong both felt and wanted to
be a leader. Consequently, negotiation would require too much effort in dealing with any
minimal term and property rights. In fact, the very last negotiation, incurred in 2004, was about
how long Disney would have hold the rights of the future Pixar movies, whether Pixar would
have the rights to any sequels and who would have got tv rights. However, despite the
tremendous Pixars market power, to maintain its role in the film market, given its high costs in
CG film production and its lack of capabilities in producing them at successful levels (such that,
as it is evident from Exhibit 1, Walt Disney produced an CG film only once and never after!),
Walt Disney needed Pixar. Moreover, Pixar wanted as it was actually looking for in the
meanwhile of its renegotiation with Disney a partner with which collaborating, and Walt
Disney was actually the strongest one in terms of brand and customer loyalty. Therefore, despite
the negative opinions given by financial investors, an acquisition was the only possible way to
sustain a relationship between the two firms: the organizational costs would be for sure lower
than those required to state a contract. However, in the mean time all media commentators
sustained also that an acquisition would threaten a cultural clash and, thus, huge organizational
costs. By the way, it should be considered the following aspects:
- Pixars leader Lasseter worked at Disney during its early years, when every employee was
made part of the creation of the film: it is as saying that, in a certain way, Pixars culture
had some of its roots in Walt Disney; therefore such a cultural clash could be expected not
so insurmountable and destructive;
- during all those years after The Lion King, Walt Disney had been successful only thanks
to the close relationship with Pixar.
Therefore, it could be eventually inferred that incurring an acquisition would ask for lower
transaction costs than loosing the opportunity to be successful or facing even higher transaction
costs in contractual negotiations.

3. Which are the key lessons you learned from this case analysis?

First of all, we have learned that the impact and the personality of a single man can make a huge
difference in the development and in the growth of a company. More specifically, during the
renegotiation in 2004, the fights between Eisner and Jobs made it impossible to find a suitable
agreement, putting at risk the future of both Disney and Pixar. Even though some said that the
acquisition failed because of the length of the negotiations, the role played by the chairmen was
crucial, for they represented the company as a whole. We could also note that the rocky
relationships between the two men might also be due to the very different companies they
worked for. If cultures are not so similar, mergers and acquisitions often fail to occur or -even
worse- if they do, the company will entail huge costs to retrain workers, having different
responses to changes.
If we follow Disneys story, we can say that it reached the maturity phase in the 21st century,
with the only alternative of acquiring Pixar as to maintain its market power and dominance.

4
Talking about fit, probably the reason for the low revenues for Disney is that the company was
not actually adapting to the new innovations brought by computer-generated drawings. Disney
was in fact trying to stick to the old-fashioned hand-drawn pictures in order to cut costs. On the
other hand, Pixar had always been up to date, trying to serve the demand for new and creative
lifelike characters, focusing on the development of a unique technology for animation and
editing. The young firm created and exploited its own experience curve, gaining an incredible
competitive advantage on all the other competitors.
Fit is also seen at the organizational level, where people are not only hired for their creativity but
also for their fit to the values of Pixar. On the contrary, Disney lacked of a perfect blending of
technology and creativity.
We have also learned that if the fit between the environment and a company is very weak, there
is the need to find other alternatives. In the late 90s, Disney was no more fitting the changing
environment of animation, as its technology was more than surpassed and thus it needed look for
entering into a deal with Pixar.
At the cultural level, Disney and Pixar differ a lot in the amount of communications and
information shared: in Pixar, communication is fostered by the creation of campus-like company
whereas in Disney there is a more rigid exchange of ideas (for example their reward system
focuses on the idea given by the individual and not by the community of the group). In our
opinion, Disney in fact should have had a different organizational structure, less rigid and more
flexible, to best fit such a creative and unpredictable environment and it should have also tried to
find ways to keep talents in the organization rather than letting them switch to more attractive
companies.
Moreover, Pixar has been very smart in diversifying in the animation sector, exploiting its dated
experience in computers and software to speed up the editing phase, the colouring of images,
sudden changes and used it also to become different from other companies by trying to create
more lifelike characters. This increased shareholders value through the creation of synergies
among Pixars businesses.
Even if these firms were very different, they could have defeated every competitor, since
strengths and weaknesses compensated each other in a unique formula, joining together a
consolidated brand power with an inimitable technology.

5
Exhibit 1 - Disney SWOT Matrix
Strengths
Consolidated brand power
Presence of multiple distribution
channels
Good Financials
Broad product portfolio
Strong cable and satellite networks
Consolidated supply chain
Strong workforce (qualitatively and
numerically speaking)
Opportunities
International Markets
Expansion of cruise Business
New entertaiment
Growth in data services
Weaknesses
Lack of 3D technology
Too much dependency on Pixar for
the development of 3D movies
No possibility of product
differentiation
Lack of successful new ideas after
the King Lion
Negative opinion for Hong Kong
Disneyland resort
Slow recent revenue growth
Threats
Pixars new move
Presence of new strong competitors
Piracy issues
Further economic downtown adding
pressure to revenue
6
Exhibit 2 - Pixar SWOT Matrix

Strengths Weaknesses

Remarkable cost advantage and cost Poor supply chain

savings Long development time needed for
Effective organisational movies
communication Limited annual movie release
Loyal costumers increased revenue volatility
Market share Leadership No consolidated distribution channel
Reputation Management Business focused only on animation
Excellent use of 3D technology and
consequently excellent computer
graphic
Strong and consolidated brand
Talented team

Opportunities Threats

Big boom of 3D animation Presence of digital piracy threat that

New deals from other company could decrease sales of Pixar movies
Asset leverage Hostile takeover from an other
Product and services expansion company
process
Takeovers
Growing international movie
audience

7
Exhibit 3 - How Pixars Strengths can mitigate Disneys Weaknesses points

Disneys Weaknesses Pixars Strengths

"Lack" of 3D technology Excellent use of 3D technology and

Too much dependency on Pixar for consequently excellent computer
the development of 3D movies graphic
No possibility of product Remarkable cost advantage and cost
differentiation savings
Lack of successful new ideas after Effective organisational
The Lion King communication
Negative opinion for Hong Kong Loyal costumers
Disneyland resort Reputation Management
Slow recent revenue growth Strong and consolidated brand
Talented team
Market share Leadership

Exhibit 4 -How Disneys Strengths can mitigate Pixars Weaknesses points-

Pixars Weaknesses Disneys Strengths

Poor supply chain Consolidated brand power

Long development time needed for Presence of multiple distribution
movies channels
Limited annual movie release Good Financials
increased revenue volatility Broad product portfolio
No consolidated distribution channel Strong cable and satellite networks
Business focused only on animation Consolidated supply/distribution
chain
Strong workforce (qualitatively and
numerically speaking)

8
Exhibit 5

9
Exhibit 6

10