Sony-Columbia Pictures: Lessons from a Cross Border Acquisition
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Case Code: BSTR119 Case Length: 17 Pages Period: 1989-2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.500 Organization: Sony Pictures Entertainment Industry: Media and Entertainment Countries: US/Japan Themes: Media and Entertainment |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Reasons for the Acquisition
Sony envisioned the convergence of electronics and entertainment devices in the early 1990s. Hence, it felt that it made good business sense to merge the company's electronics division that developed products like VCRs and CD players, which it called the "hardware," with entertainment synergies between its hardware and software businesses - CBS and Columbia would supply the software (music and movies) to fuel demand for the company's next generation hardware (digital video technology). Sony's decision to acquire Columbia was also driven by the company's previous experience of losing to Matsushita in the video cassette recorder (VCR) business in the 1970s. According to Morita, Sony's Betamax video format standard would have been a great success (more than Matsushita's VHS video format standard), if only the company had owned a library of films and tapes to release in Beta format. Sidney Sheinberg, president, MCA Inc.(a rival company of Sony) also supported this view and said, "Had Sony owned Columbia at the time, I suspect the prevalent system would now be Beta." Apart from this, Morita's dream of owning a Hollywood film studio was also one of the major factors that led Sony to acquire Columbia...
Post-Acquisition Blues
After acquiring Columbia, Sony encountered many problems, which analysts attributed to its poor corporate governance and mismanagement. However, some analysts also felt that the vast difference between the Japanese and American management cultures was also responsible for the failure of Sony to manage Columbia efficiently.
CORPORATE GOVERNANCE
In light of the negative and anti-Japanese publicity generated among the Americans as a result of the acquisition, Sony proclaimed that it had no intention to influence things at Columbia or dominate Hollywood through the studio. The company reiterated its main objective behind the acquisition - to benefit from synergies accruing from combination of its hardware with Columbia's software. To further ensure Americans and media that it had no intentions of tampering with the culture of Hollywood, or Columbia, Sony chose to allow the American managers of the company complete control and granted total autonomy to them...
The Revival Efforts
In November 1994, Canton was made the new chairman of SPE. In the same month, Sony wrote off $2.7 bn of investment in SPE and disclosed an additional $510 mn operating loss. The company attributed these to a combination of unusual items such as abandoning a large number of under-development projects and settling numerous law suits and contract claims. The write-off had a severe affect on Sony's financials with the company reporting a net loss of $3.1 bn for the six-month period ending September 1994, as compared to a $578 mn net profit for the same period in 1993. The write-off also led to a sharp decline in Sony's share price at the Tokyo, New York and London Stock Exchanges. At this point, Sony decided to take an active part in the management of its movie business and initiated a cost-cutting exercise at SPE, through Alan Levine (Levine), president of SPE. In 1995, the marketing and distribution arms of Columbia and TriStar were consolidated in order to reduce costs and other overheads. Attempts were also initiated to bring back some stability in SPE's management, which was in a chaotic condition...
Reviving SPE
According to Calley, by the time he took over, the movies division was a 'Hollywood-centric' private club with no accountability for its heavy expenditures, and with the Sony headquarters completely in the dark as to where the money was going. He said, "When I got here, there were three movies being made that nobody even knew anything about. No one knew who had approved them. They just grew here through some spontaneous generation." Calley cancelled SPE's open-ended, multi-million deals with five independent producers and tried to confine the production costs to the amount laid out by Sony headquarters. Under Calley's leadership, apart from eliminating extravagance from its production and marketing, SPE also reduced the number of vendors it dealt with from 14,000 to 800, which helped it reduce its production costs. Calley also speeded up the decision-making process by thinning the ranks of SPE, and combined the Columbia and TriStar operations, eliminating duplication of infrastructure and development team costs...
Synergies of the Acquisition Real?
According to analysts, though Sony's venture into Hollywood was no longer a nightmare, even by the late 1990s, there were no signs of the synergies between the hardware and software that Sony claimed to have envisioned at the time of acquisition. Analysts said that though Sony had tried to push technologies by stamping its music into digital audiotapes (DAT) and its films into its Video Walkmans (8-mm cassette players), with the aim of selling more disks and cassette players in the US, such tactics had failed to contribute to Sony's hardware sales in the US....
Exhibits
Exhibit I: Japanese Management Versus American Management
Exhibit II: Sony's Box Office Ranking (1995-1997)
Exhibit III: SPE's International Television Ventures
Exhibit IV: Sony's Revenues (By Segment)
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