4.11. Disney and Pixar

Question 1

History of Disney

Answer 1

– First film produced in 1932 (Snow White)
– After The Lion King (1994) all movies below expectation
– Huge company in terms of assets, extremely diversified – movies, toys, memorabilia, theme parks, characters, studios, TV channels, 170,000 employees in 40 countries

Question 2

History of Pixar

Answer 2

– Tech start up (1970s computer science nerds)
–Jobs buys and subsidizes it with own funds with the idea of creating ”graphics computers” (CAT scans etc)
– Short stories were part of the corporate strategy from the beginning but at a small scale
– Uses 3D computer animation, not hand drawings
– Disney (through Katzenberg) allows Pixar to expand into full length animated movies by forming an alliance to make 3D movies

Question 3

Relationship between Disney and Pixar

Answer 3

– First alliance(1986)–Pixar is learning about the business and Disney is getting state of the art tech skills; Disney has all the power
– In the second deal after Toy Story and the IPO Pixar gains strength
– Third deal: Jobs realize she is putting in more than his share and wants more independence (2002) – ”the best deal out there”
• Original agreement allowed Disney to make sequels without Pixar’s involvement; Jobs not happy with that
• What films count towards the 5 film agreement
• How to split ownership of the movies after the alliance agreement expires (this is NOT a JV)
• Eisner (DisneyCEO)refuses to sign new deal,resigns,new CEO (Iger)

Question 4

Disney’s POV: is it good idea to acquire Pixar for $7 billion? (in terms of strategy)

Answer 4

YES:
- revive core - animating character is what disney does
- disney does not currently have the skills to grow organically into this area
- percentage revenues from pixar are increasing (strategically important area, 60% profits come from pixar)
- get ownership of all past pixar films which we can milk for revenues
NO:
- pixar got lucky, they have not cracked a formula might become obsolete
- computed based animation is just a hype

Question 5

Disney’s POV: is it good idea to acquire Pixar for $7 billion? (in terms of finance)

Answer 5

YES:
- great deal because pixar has no debt (cash is 72% of assets and low D/E)
NO:
- paying huge premium (more than book value)
- need 15 hits just to break even
- dilutes our stock

Question 6

Disney’s POV: is it good idea to acquire Pixar for $7 billion? (in terms of competition)

Answer 6

YES:
- someone else might buy Pixar
- pixar needs disney (as they have the ability to sell characters in all channels
NO:

Question 7

Disney’s POV: is it good idea to acquire Pixar for $7 billion? (in terms of execution)

Answer 7

YES:
- we have worked together for a long term so we can integrate effectively
NO:
- cultures clash, buying them might destroy their creativity
- if we let them do their own thing then we do not get synergies

Question 8

Pixar’s POV: is it good idea to acquire Pixar for $7 billion? (in terms of strategy)

Answer 8

YES:
- disney is the best owner at distributing movies => add value
- pay large price because they have synergies
- have a good working relationship
- give endless resources
NO:
- kill creativity
- workers will quit

Question 9

Pixar’s POV: is it good idea to acquire Pixar for $7 billion? (in terms of finance)

Answer 9

YES:
- great deal, shareholders will get a good conversion of their stock (disney has to give up 2.3 for 1 pixar)
- better sell now while we are at our peak
NO:
- let’s come up with another alternative so that we can keep our huge margins (bonuses, dividends) to ourselves

Question 10

Alternatives for Disney?

Answer 10

Does not seem possible this is something that is so strategic and core to what they do, cannot contract for it
Grow organically:
- had been failures so far
- hard to replicate pixars knowledge (ahead of the game)
- no leadership
Hire the best from pixar?
- hard due to culture
- hard to do due to team based nature of work
Establish another alliance
- with whom? pixar is sitting on the technology
Renegotiate contract with pixar
- extremely complicated (uncertainty) - needs to cover distribution profits, sequels, control of production, who owns the characters, they are partners and competitors now

Question 11

Alternatives for Pixar?

Answer 11

Grow organically:

• huge capability clash
• massive investment
• disney has done it for years