Disney's Acquisition of Pixar
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Case Code: BSTR203 Case Length: 13 Pages Period: 1995-2005 Pub Date: 2006 Teaching Note: Not Available |
Price: Rs.300 Organization: Walt Disney, Pixar Industry: Media , Entertainment, Gaming Countries: US Themes: Mergers, Acquisitions, Strategic Alliances |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
The Disney-Pixar Partnership
In May 1991, Disney entered into an agreement with Pixar for developing and producing three computer animated feature films. According to the agreement, Disney agreed to produce movies to be developed and directed by Pixar's John Lasseter. Disney agreed to market and distribute these movies.
Pixar was to receive compensation based on the revenue obtained from distributing these films and related products. Including distribution fees, Disney was to get 87% of the distribution proceeds. Analysts felt that the agreement gave Pixar an expert partner in the film business with great marketing capabilities. The first film under the agreement was Toy Story which was released in November 1995. It was the first computer animated feature film that was of one hour and twenty one minutes duration. The film was a huge success and generated over US$ 360 million in worldwide revenues. After the release of Toy Story, Disney extended its partnership with Pixar to a co-production agreement in 1997, under which Pixar agreed to produce five original computer-animated feature films, in a span of ten years...
The Acquisition
In March 2005, the Disney Board elected Iger as the company's CEO to succeed Eisner on September 30, 2005. Iger got a call from Jobs who hinted at a possible discusion on working together again. Analysts felt that Iger would find it difficult to strike a new deal as proposed by Jobs as it was heavily loaded in favor of Pixar.
However, Iger adapted the proposal his own way. He asked for Disney's content to be distributed over the Internet through Apple's online store - iTunes. In October 2005, Iger and Jobs signed a deal to sell the past and current episodes of television shows of its ABC and Disney channels through iTunes. It started with five shows which included the popular shows Desperate Housewives and Lost. Jobs was pleased with the Iger's suggestion of linking up to offer videos through iTunes. Iger said that the deal with Apple was finalized in just three days. Meanwhile, Jobs also started re-negotiating on the Disney-Pixar agreement. With this rapprochement, there was speculation that Disney might acquire Pixar...
The Rationale
Analysts said this deal was more important to Disney than to Pixar. For Disney, the acquisition gave it ownership of the world's most famous computer animation studio and its talent, with whom it had teamed up to create block busters since the 1990s. The timing was also perfect as its own animation films had failed one after another. Its first full computer animation film Chicken Little (released in November 2005) fared only marginally well. The deal would bring the technology company Apple (through Steve Jobs) closer to Disney, and Iger could further increase the digital content that was being offered through Apple. Analysts said that having Jobs on the Disney board would certainly give the company the necessary technology edge and direction. Further, with Lasseter, the creative genius behind Pixar's block busters, in charge of the new division, Disney would get the necessary push in creativity which it seemed to lack in recent times....
The Road Ahead
On the several benefits Disney would derive, Nelson Gayton, Professor at Wharton School of Business said, "I believe that the acquisition of Pixar was of utmost strategic importance to Disney, not only because of where Disney's previous distribution relationship with Pixar seemed headed, but also because of Pixar's potential value to Disney's 'family entertainment' brand and assets, like theme parks and television, that feed off this brand."
While there were several possible synergies that could arise from the acquisition, there were also some potential trouble spots for Disney. The rise of Jobs to the Disney board as the single largest shareholder could become a major worry for Iger as Jobs was slightly unpredictable. The merger, in place of the partnership with Pixar, might make Iger second to the powerful and experienced Jobs. An industry analyst termed the move bold but predicted that Iger might leave Disney in a year, saying, "Iger just put a gun to his head." Analysts felt Iger had to be careful as he was still trying to create his own identity after being under the shadow of Eisner, who had been at the helm for more than twenty years...
Exhibits
Exhibit I: Steamboat Willie
Exhibit II: Disney's Recent Financials
Exhibit III: Awards Won by Pixar Films
Exhibit IV: Pixar's Recent Financials
Exhibit V: Details of Co-Production Agreement Between Disney and Pixar
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