The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire Economics of Strategy and Organization
Are Disney and Pixar better together?
The co-production agreement between Disney and Pixar has led Disney to rely on revenue and characters produced by its partner. Pixar CG movies contributed more than $3.5 billion to Disney Studio revenues and around $1.2 billion to Disney’s operating income which represented 10% of revenue and 60% of total operating income of Disney over the period. Pixar’s unmatched technology which helped animators to make films faster than its competitors and at a fraction of their cost and Disney’s distribution network helped in generating a succession of box office hits. Both Disney’s and Pixar’s work culture was such that it motivated creativity among employees which in turn enabled them to make quality movies.
Disney agreed to fully fund the production cost of animated movies but also in return wanted the ownership rights which later was renegotiated by Pixar demanding for more favourable economic terms and ownership rights. Also there was a misbalance in the contribution of revenues generated from the movies. In total Disney would receive at least 60% of each movie’s profits whereas Pixar would only get 40% of the total profits that the movie generated.
What are the alternatives to acquire Pixar? Is ownership really necessary? Or could another long-term contract do the trick? The alternatives to acquire Pixar are-
Rather than a merger Disney and Pixar can form an equity alliance between them where they can share each other’s resources and capabilities to create best possible synergistic effect. Another option is to enter contract with Pixar that Disney will use Pixar’s talent to make films and pay Pixar a fixed percentage of revenue or profit from the film and retain with itself the distribution rights of the film. Next option is to enter into another long term contract with Pixar where Disney will do the distribution part of the film made by Pixar and be happy with a fixed distribution fee. Disney can also think of acquiring Dreamworks which is a close competitor of Pixar. Disney has certain incentives to acquire Pixar.
The rationale behind Disney to acquire Pixar was:-
The acquisition can give Disney ownership of the world’s most famous computer animation studio and its talent. As Disney’s own animation films were failures, Disney had a good incentive to acquire Pixar. This acquisition could help Disney to reduce its competition and also going on bitter relation with Pixar. Moreover the acquisition would improve Disney’s shareholder value and P/E multiple. On the other side, looking into present relation and demands of Pixar to be in long term contract it is difficult for Disney to maintain it, as Pixar wants the exclusive future production and other rights of the film. So it is a better decision to acquire Pixar rather than any other alternative.
If you decide to acquire Pixar, how would you integrate the two companies? Where are the opportunities and the headaches, how would you handle them? Opportunities:
The technologies innovated by Pixar enabled it to make animated films faster than its competitors and at a fraction of their cost. So acquisition by Disney would give it a huge cost benefit in the industry which could have not been replicated. Eisner believed in making clear who was good at their job and who was not so good and wanted to give control to leaders who had a sense of judgment about creativity and business. At Pixar, company had a style of ‘blending’ creativity and technology. This shared style of leadership may ensure a successful acquisition. Animation was integral to Disney’s strategy and Pixar’s track record for producing smash hits was unmatched. This seems to be a perfect match for Disney to acquire a relevant match in the industry. Top management was known for its grueling work ethics and...
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