Disney, Pixar Merger & Acquisition Detailed Strategic Case study Summary: Harvard Strategic
Management
-Naga Rakesh Chinta
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 complementary 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 unchained creativity fit and be complementary 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
initial success lied in the brand character 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 remuneration to the
employees 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 reputed films caused a more hierarchical
approach to move and film productions which caused the loss of creative idea engagement and
diminished the contributive attitude of its employees, 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 revenue model, Disneyland, toys, home videos, etc. Disney’s board
and Eisner also had failed to realize Katzenberg's suggestions 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 discussed here, Disney was competitively 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 proprietary 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 enormous
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 employees 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 passionate with its animations and
creations. Pixar operated on three principles, “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 corporate 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.
Pixar 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 Pixar was a
perfect fit as they perfectly complemented 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
technological resources.One of the most decisive reasons that pixar 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 selfdeprecating 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 competencies 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 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 proprietary 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 commercials with cocacola, 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 cooperation 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 cooperation.
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 lowered in favor or Disney. Finally, the deal was closed where disney 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 Century Fox.
This was a huge loss especially in the context of Disney, which disambargled a change for extreme
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 evasive 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 exuberant 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
responsibility mainly lies within Pixar and with minor-major contributions to storyboard is given by Disney to ensure cooperative competitive advantage over rivals like
Dreamworks, etc.
• No change of positions of direct leadership in pixar, jobs and lasseter 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 pixar's three governing principles which has laid 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.