Disneys Acquisition Of Pixar Media Essay

Disneys Acquisition Of Pixar Media EssayIn January 2006, the US based media and entertainment graduate(prenominal) society Walt Disney announced that it would acquire its elan vital partner Pixar for US$ 7.4 billion in stock. The helping hand was expected to be finalized by mid-2006. Disney had already been in partnership for producing and distri yeting sprightliness takes with Pixar since 1991. However, in January 2004, owing to differences with Disneys then chief executive characterr Michael Eisner, Pixar had announced that it would partner with an stark naked(prenominal) distribution company in 2006. But Robert Iger, who overlyk over from Eisner on September 30, 2005, bring to talks with Pixar and finally succeeded in acquiring it.Our suffer will examine the partnership agreement between Disney and Pixar and the incidents that led to the break-up of ties. We will discuss how the new CEO Robert Iger, who succeeded Michael Eisner, went on to re-establish ties with Pixar and Steve Jobs, who held 50.6% equity stake in Pixar. The questions we seek to answer through this case areIs there a synergy between Disney and Pixar?Did Disney pay too much to acquire Pixar?Is the Pixar acquisition in the scoop out interest of Disneys shareh onetime(a)ers?Will the difference in corporate culture allow Disney and Pixar to work effectively unneurotic?Will this acquisition be successful?HistoryThe Disney toshWalt Disney Animation Studios is the subsidiary of The Walt Disney Company. It was founded in 1934 when Walt Disney initiated the takings of Snow W boote and the Seven Dwarfs, which was Walt Disneys beginning brag length animation film. The move however started in 1937, when selected animators from the shorts division were moved into the features division.Snow White was an unprecedented success when it was released in February 1938. It moved critics and audiences as well and is considered onenessness of the true animation classics of all times. After, the viability of feature length animation was firmly established with the success of Snow White, WDAS would go on to make a series of critically acclaimed and successful shake up features like Dumbo, Cinderella. They would excessively expand into new segments like plump action features, television and theme parks.Since its founders death in 1966, The Walt Disney Company had narrowly survived takeover attempts by corporate raiders. Its shareholders Sid Bass and Roy E. Disney brought on Michael Eisner and former Warner Brothers chief Frank Wells to replace Ron W. Miller in 1984 and identification number the company round.During the second half of the 1980s and early 1990s, Disney revitalized. Beginning with The Little Mermaid (1989), its flagship animation studio enjoyed a series of commercial and critical successes that helped reinvigorate the Ameri offer animation industry. Disney also broadened its adult offerings in film when then Disney Studio Chairman Jeffrey Katzenberg acquir ed Miramax Films in 1993. Disney acquired many other media sources, including ABC and ESPN.However, by this time, the competitive scenario changed again. numerous new studios had face-liftn up and were producing high quality animated features. Also there was meaningful tiredness and indifference from the audience who had had enough of Disneys storytelling and animation styles. The rise of new studios also increased demand for artists and stencillers, driving salaries up, causing the bud build ups of hand drawn animation features to inflate. The rise of Computer Generated Imagery (CGI) was also eating into Disneys grocery store share.Starting from 2000 onwards, massive layoffs had reduced staff to 600. Also the Studio stubborn to focus on CGI animation for emerging releases instead of the traditional animation methods to contest with Pixar, Dreamworks and Blue Sky Studios. This led to the shutdown of the Paris Studio in 2003 and the conversion of the Orlando Studio into a them e park attraction in 2004.Michael Eisner StoryIn 1976, the Chairman of Paramount Pictures, recruited Michael Eisner from ABC and made him president and CEO of the photograph studio. During his tenure at Paramount, the studio turned out such hit films as Saturday Night Fever, Grease, the Star Trek film franchise, and Beverly Hills Cop, and hit TV shows such as Happy Days, Laverne Shirley, Cheers and Family Ties.Diller, the Chairman of Paramount, left in 1984, and Eisner expected to fasten on Dillers position as studio chief. But he was passed over. Eisner then lobbied for the position of CEO of The Walt Disney Company.Michael Eisner took over as CEO of the Walt Disney Company in 1984 and turned it into a media giant whose interests included photographs, sports franchises, theme parks and television ne 2rks.During the early part of the 1990s, Eisner and his partners set out to plan The Disney Decade which was to feature new parks around the world, existing park expansions, new fil ms, and new media investments. musical composition some of the proposals did follow through, around did non. These included the Euro Disney Resort (now Disneyland Paris), Disney-MGM Studios (now Disneys Hollywood Studios), Disneys California Adventure Park, Disney-MGM Studios Paris (eventually open up in 2002 as Walt Disney Studios Park), and various film projectsFrank Wells, COO of Walt Disney. died in a helicopter crash in 1994. When Jeffery Katzenberg was passed over for Wells post, he resigned and organize Dreamworks SKG with partners Steven Spielberg and David Geffen. Dreamworks would go on to become one of the biggest and most successful movie studios of all time and a big competitor to Disneys animation features. Instead, Eisner appointed Michael Ovitz, one of the founders of the Creative Artists Agency, to be President, with minimal involvement from Disneys be on of directors, which included many influential and respected members. Ovitz populateed only 14 months and l eft Disney in December 1996 via a no fault termination with a severance package of $38 million in cash and 3 million stock options expense more or less $100 million at the time of Ovitzs departure. The Ovitz episode left a bad taste in the mouth and stack were very disappointed with Eisners high handedness and autocratic style of working.By 2003, Disneys fortunes had flagged and Roy E. Disney, the son of Disney co-founder Roy O. Disney and nephew of Walt Disney, resigned from his positions as Disney vice chairman and chairman of Walt Disney Feature Animation, accusing Eisner of micromanagement, flops with the ABC television network, timidity in the theme park business, turning the Walt Disney Company into a rapacious, soul-less company, and refusing to establish a clear succession plan, as well as a string of box-office movie flops starting in the year 2000.On March 3, 2004, at Disneys annual shareholders meeting, a surprising and unprecedented 43% of Disneys shareholders, predo minantly rallied by former board members Roy Disney and Stanley Gold, withheld their proxies to re-elect Eisner to the board. This effectively ended Eisners stint at Disney.On March 13, 2005, Eisner announced that he would step down as CEO one year forwards his contract expired. Eisners re posture was his longtime assistant, Robert Iger.The Pixar StoryPixar started in 1979 as the Graphics Group, a part of the Computer Division of Lucasfilm.It is based in Emeryville, California. It was launched with the hiring of Dr. Ed Catmull from the rude(a) York Institute of Technology (NYIT), where he was in charge of the Computer Graphics Lab (CGL).. The team up at Pixar under Dr. Catmull worked on creating Motion Doctor, which allowed traditional cel animators to do computer animation with minimal training.Initially, Pixar started off as a computer hardware company whose core product was the Pixar Image Computer, a system in the main sold to government agencies and the medical community. One of Pixar Image Computers biggest customers was Disney Studios. However, The Image Computer never sold well. In a bid to drive sales of the system, Pixar employee basin Lasseter-who had long been creating short demonstration animations, such as Luxo Jr., to show off the devices capabilities-premiered his creations at SIGGRAPH, the computer graphics industrys largest convention, to great fanfare. This would begin Pixars journey into the world of animated feature films.Poor sales of Pixars computers threatened to bankrupt the company, And Lasseters animation segment began producing computer-animated commercials for outside companies to bring in much needed revenue enhancement. Early successes included campaigns for Tropicana, Listerine, and LifeSavers.The team began working on film sequences produced by their parent, Lucasfilm or worked collectively with Industrial Light and Magic, ILM is another Lucasfilm company, on special effects. In 1986, Steve Jobs purchased Pixar from Luc as Films shortly after he left Apple Computer. Jobs paid $10 million as capital into the company. The newly independent company had 45 employees and was headed by Dr. Edwin Catmull, President, and Dr. Alvy Ray Smith, Executive crime President and Director. Jobs served as Chairman and Chief Executive Officer of Pixar.Pixar has made 10 feature films beginning with Toy Story in 1995 and each one has achieved critical and commercial success. Pixar followed Toy Story with A Bugs Life in 1998, Toy Story 2 in 1999, Monsters, Inc. in 2001, Finding Nemo in 2003 (which is, to date, the most commercially successful Pixar film, grossing over $800 million worldwide), The Incredibles in 2004, Cars in 2006, Ratatouille in 2007, WALL-E in 2008, and Up in 2009 (the first Pixar filmpresented in Disney Digital 3-D). john Lasseter StoryLasseter was born in Hollywood, California. When he was in college., he heard of a new program at California Institute of the Arts and decided to leave his current coll ege to follow his dream of becoming an animator.. Lasseter was taught by three members of Disneys Nine Old Men Eric Larson, Frank Thomas and Ollie Johnston.On graduation in 1978 , Lasseter joined The Walt Disney Company, as a Jungle Cruise skipper at Disneyland in Anaheim. He later obtained a job as an animator at Walt Disney Feature Animation, Since the release of 101 Dalmatians in 1961, Lasseter felt WDFA had hit its creative peak and there was no innovation coming through in some(prenominal) the animation or the storytelling. In 1980 or 1981 he came across some video tapes from one of the then new computer-graphics conferences, and he experienced as a revelation.He saw the huge potential of this new technology in revitalizing the creative juices at WDFA. Lasseter realized that computers could be used to make movies with three dimensional backgrounds where traditionally animated characters could interact to add a new, visually stunning depth that had not been conceived before.D uring this time, Lasseter tried to sell his ideas to Disneys top bosses and he got the approval to do a short test film on the famous story Where the Wild things are. However,he unknowingly stepped on some of their direct superiors toes by circumventing them in their devotion to get the project into motion. One of them, the animation administrator Ed Hansen disliked it so much that when Lasseter and Wilhite tried to sell the idea to him and Ron Miller, which they at that time were already aware of, they turned it down. A few minutes after the meeting, Lasseter was summoned by Hansen to his office, where John was told that his employment in the Walt Disney Studios had been terminated.While putting together a pack for the planned feature for Disney, he had made some contacts in the computer industry, among them Alvy Ray Smith and Ed Catmull at Lucasfilm Computer Graphics Group. After being fired, Lasseter visited a computer graphics conference at the Queen Mary in Long Beach, where he met and talked to Catmull again. Before the day was over, Lasseter had made a deal to work as an interface designer with Catmull and his colleagues on a project that resulted in their first computer animated short The Adventures of Andr and Wally B.Lasseter oversaw all of Pixars films and associated projects as executive producer. He also personally directed Toy Story, A Bugs Life, Toy Story 2, and Cars.Lasseter has won two Academy Awards, for Animated Short Film (Tin Toy), as well as a Special Achievement Award (Toy Story). He was also nominated on four other occasions in the mob of Animated Feature, for both Cars (2006) and Monsters, Inc. (2001), in the Original Screenplay category for Toy Story (1995) and in the Animated Short category for Luxo, Jr. (1986), while the short Knick set (1989) was selected by Director Terry Gilliam as one of the ten best animated films of all time.Corporate Culture at PixarAt most studios, a specialized development department generated new movi e ideas. Pixar assembles cross-company teams for this purpose. Teams comprise directors, writers, artists and storyboard people who originate and refine ideas until they encounter the potential to become great films. Pixar believes in conclusion people who will work effectively together and ensures a healthy social dynamics in the team and this, they believe helps the team solve problems. some other important tenet in Pixar is the creation of a peer culture, where employees encourage people throughout the company to help each other produce their best work. At Pixar, daily animation work is shown in an incomplete state to the whole crew. This process helps people get over any embarrassment nearly sharing unfinished work, so they become even more creative. It enables creative leads to communicate important points to the entire crew at once. And sometimes a progressive piece of animation sparks others to raise their game.At Pixar, the belief is that, the most efficient way to resol ve the numerous problems that arise in any complex project is to trust people to address difficulties directly, without having to get permission. So, everyone is given permission to communicate to anyone. Within Pixar, members of any department can approach anyone in another department to solve problems without having to go through proper channels. Managers translate they dont always lay down to be the first to know about something dismissal on in their realm, and that its sanction to walk into a meeting and be surprised.Special attention is given to craft a learning environment, this reinforces the mindset that everyone is learning and that its fun to learn together. Pixar University trains people in multiple skills as they advance in their careers. It also offers optional courses (screenplay writing, drawing, sculpting) so people from different disciplines can interact and appreciate what each other does.While many people dislike Post-Mortems of projects as they would rather d iscuss what went right than what went wrong and after investing extensive time on a project, theyd like to move on. So post-mortems at Pixar are structured to stimulate discussion. Pixar asks post mortem participants to list the top quin things theyd do again and the top five things they wouldnt do. The positive-negative balance makes it a safer environment to explore every aspect of the project. Participants also bring in lots of performance data including metrics such as how often something had to be reworked. Data further stimulates discussions and challenges assumptions based on subjective impressions.Corporate Culture at DisneyUnder autocratic former CEO Michael Eisner, examine rather than collaboration was the norm and unit heads became afraid or unable to make decisions. With Disney vying for a share of digital market, the timing of the upheaval could hardly have been worse.Fortunately, new chief executive tail Iger is a wholly different animal to Eisner and immediately set out to restore harmony. Achieving this confused transforming the culture rules closely beyond recognition. Unlike his predecessor, IgerRules by consensusShows faith in his subordinatesAnd is willing to keep a low profile and let others take the plaudits.No longer hold by central control, key players in the organization now enjoy greater freedom to call the shots. And while Eisner overtly pooh-poohed any ideas he did not like, Iger values and encourages the contributions of others. Consequently, during weekly meetings the dialogue no longer flows just one way.The CEO visits rank and file to show them that their efforts are appreciated and has made his office a more welcoming place. This might seems as trivial gestures to some but the effect on morale can be priceless.But possibly Igers most significant attribute is the trust he places in his people to get the job done. In contrast, Eisner cramped the style of others by insisting on being involved in anything and everything. In time, Disney gained a reputation of being slow to react. But Iger tells his people to go for it and will only get involved when it is absolutely necessary.Igers back seat style of leadership has allowed scriptwriters more freedom and the studio chief greater decision making power.Disney and Pixar The PartnershipDuring the 90s there was an detonative growth in the use of CGI in animation and live action feature films. Soon CGI animation came to dominate special effects in both kinds of features. The barrier between animation and special effects were shattered and the enhancement of Hollywood films using CGI became second nature and often went unnoticed.In 1991, due to personnel casualtyes suffered from their computer hardware business, there was serious financial strife at Pixar. This resulted in substantial layoffs in their computer department. Pixar made a $26 million deal with Disney to produce three computer-animated feature films, the first of which was Toy Story. Despite this, the company was losing money and Steve Jobs was thinking about divesting his shares in Pixar. Only after confirmative that Disney would distribute Toy Story for the 1995 holiday season did he decide to give it another chance. The film went on to gross more than $350 million worldwide.Disagreements started to cut back up between Disney and Pixar from their next project together, Toy Story 2. Originally intended as a straight-to-video release (and thus not part of Pixars three-picture deal), the film was eventually upgraded to a theatrical release during production. Disney refused to consider this feature film as part of the three picture deal as demanded by Pixar. Pixars first five feature films have collectively grossed more than $2.5 billion, equivalent to the highest per-film average gross in the industry. Though profitable for both, Pixar later complained that the arrangement was not equitable. While Pixar was created and produced, and Disney only handled marketing and di stribution, Profits and production costs were being split 50-50, and not only that, Disney exclusively owned all story and sequel rights and also collected a distribution fee. The lack of story and sequel rights was perhaps the most onerous aspect to Pixar and set the stage for a contentious relationship.The two companies attempted to reach a new agreement in early 2004. The new deal would be only for distribution, as Pixar intended to control production and own the resulting film properties themselves. The company also wanted to finance their films on their own and collect 100 percent of the profits, paying Disney only the 10 to 15 percent distribution fee. More importantly, as part of any distribution agreement with Disney, Pixar demanded control over films already in production under their old agreement, including The Incredibles and Cars. Disney considered these conditions unacceptable, but Pixar would not concede.Disagreements between Steve Jobs and then Disney Chairman and CEO Michael Eisner made the negotiations more difficult than they otherwise might have been. They broke down completely in mid-2004, with Jobs declaring that Pixar was actively seeking partners other than Disney. Pixar did not enter negotiations with other distributors. After a lengthy hiatus, negotiations between the two companies resumed following the departure of Eisner from Disney in September 2005. In preparation for potential fallout between Pixar and Disney, Jobs announced in late 2004 that Pixar would no longer release movies at the Disney-dictated November time frame, but during the more lucrative early summer months. This would also allow Pixar to release DVDs for their major releases during the Christmas shopping season. An added benefit of delaying Cars was to extend the time frame remaining on the Pixar-Disney contract to see how things would play out between the two companies.Acquisition by DisneyDisney announced on January 24, 2006 that it had agreed to buy Pixar for app roximately $7.4 billion in an all-stock deal. Following Pixar shareholder approval, the acquisition was completed May 5, 2006. The transaction catapulted Steve Jobs, who was the majority shareholder of Pixar with 50.1%, to Disneys largest individual shareholder with 7% and a new seat on its board of directors. Jobs new Disney holdings exceed holdings belonging to ex-CEO Michael Eisner, the previous top shareholder, who still held 1.7% and Disney Director Emeritus Roy E. Disney, who held almost 1% of the corporations shares.As part of the deal, Pixar co-founder John Lasseter, by then Executive Vice President, became Chief Creative Officer (reporting to President and CEO Robert Iger and consulting with Disney Director Roy Disney) of both Pixar and the Walt Disney Animation Studios, as well as the jumper cable Creative Adviser at Walt Disney Imagineering, which designs and builds the companys theme parks. Catmull retained his position as President of Pixar, while also becoming Preside nt of Walt Disney Animation Studios, reporting to Bob Iger and Dick Cook, chairman of Walt Disney Studio Entertainment. Steve Jobs position as Pixars Chairman and Chief Executive Officer was also removed, and instead he took a place on the Disney board of directors.Lasseter and Catmulls oversight of both the Disney and Pixar studios did not mean that the two studios were merging, however. In fact, entreeal conditions were laid out as part of the deal to ensure that Pixar remained a separate entity, a concern that analysts had had about the Disney deal.Some of those conditions were that Pixar HR policies would remain intact, including the lack of employment contracts. Also, the Pixar name was guaranteed to continue, and the studio would remain in its current Emeryville, California muddle with the Pixar sign. Finally, branding of films made post-merger would be DisneyPixar (beginning with Cars).EXHIBITSName of Feature FilmStudioTotal Gross1The Lion King(1994)Disney$783,841,7762Findi ng Nemo(2004)Disney/Pixar$864,625,9783Shrek(2001)Dreamworks$484,409,2184Monsters Inc(2001)Disney/Pixar$525,366,5975Toy Story 2(1999)Disney/Pixar$485,752,1796Aladdin(1992)Disney$504,050,2197Snow White(1937)Disney$184,925,4868Ice Age(2002)20th Century Fox$383,257,1369Incredibles(2004)Pixar$631,442,09210The Little Mermaid(1989)Disney$183,355,863 debunk 1 Top Grossing Animated Feature FilmsExhibit 2 Disney Stock Price from Aug 06 to Jun 07We start off our analysis using Porters Five Forces of Competition to understand Disneys situation in the industry and the rationale behind its actions.Threat of New EntrantsBargaining Power of SuppliersBargaining Power of BuyersThreat of SubstitutesRivalry among competing firmsThreat of new entrants CGI animation movie industry is a robust industry which is urdergoing a period of phenomenal growth. This is an attractive segment for movie studios to venture into as revenues from live action movies are falling while their budget rises ever higher. CGI animation movies are an interesting option for many movie studio to increase their toplines without nuisance their bottomlines. In this regard, we have seen many established movie studios partner with independent animation studios from within and outside the United States in creating CGI animation movies. While, these movies have not been able to garner the critical or commercial acclaim of that of Pixar, the quality and quantity of such outsourced CGI animation movies are increasing YoY and represent a significant threat to the market pull of existing players in the segment. So we would rate the threat of new entrants as high.Bargaining Power of Suppliers Resources needed for making CGI animation are the technology behind the animation, the story and the animators. Pixar has been a pioneer in creating the technology for animation and with its acquisition, Disney has backward integrated with its supplier, hence reducing the uncertainty in its environment. Both Disney and Pixar have a large team of dedicated scriptwriters and animators, all of whom work under short or long term employment contracts, the loss of a few of the natural endowment will not reduce the quality of the output of either Studios. However, scriptwriters in US are unionized and have in the past gone on strike against major studios to re carry on revenue sharing agreements from movie revenue. The strike cost studios hundreds of millions of dollars in lost opportunities, movie shot delays and cost overruns. So the employees cannot be taken for granted and Disney will have to strike a fine balancing act to please both it employees and shareholders if it wants to get the best work of the employees. We would rate the bargaining power of suppliers as medium.Bargaining Power of Buyers While in the past, almost the entire revenue receipts from movies came from the theatergoing state-supported within the US, due to the effects of globalization and technology diffusion, the receipts can now be cla ssified on basis of geography and the mode of slant of content.Worldwide movie market outside United States have become big movie spinners for Hollywood movies, sometimes receipts from offshore markets exceed that of the US market. The important markets outside of US for Hollywood movies areJapanUnited KingdomChinaEuropeStudios sells distribution rights of their movie to other studios, who are often better placed to reach out to these markets. Since Disney and Pixar have a large brand following and pull, they are better placed that most other studios to negotiate for more favourable distribution contracts. Since all movies made by Pixar till now have been movie spinners for everyone associated with it, Disney has considerable clout in negotiating for contracts.The mode of delivery of movie content can be classified intoTheatrical ReleaseDVD ReleaseInternet ReleaseSatellite TV Release different than a theatrical release, the release of DVDs and the Satellite TV rights of the movie are a significant revenue stream. The reasons stated earlier regarding Disney and Pixars unique brand placement help them negotiate the best contracts in both types of releases. Internet release is a new phenomenon and is not a significant enough part of the revenue to affect the dynamics.Overall, we would rate the bargaining power of buyers to be low.Threat of Substitute Products A big threat facing movie studios in general is movie piracy. plagiarisation is causing a meltdown in both movie and the music industry causing many studios to fail and others to change their business model. Piracy initially started off with CDs and DVDs, but with the advent and diffusion of broadband internet, online piracy is on the rise. Piracy since the 80s has been the biggest threat to the survival of movie studios as they lose billions of dollars worth of revenue receipts because of it.Since CGI movies appeal to all demographics, live action as well as traditional animated movies can be thought of as substitute products. However, historical data suggests that there is considerable cross selling between these genres and it is un apt(predicate) that somebodys interest in a different genre is going to prevent him from watching CGI movies.Overall, We would rate the threat of substitute products as medium.Intensity of Competition among existing players The existing players in the segment are very hard-hitting and spend a lot on advertising and media to promote their movies. Further consolidation within the industry looks unlikely in the short term future as most studios in the segment have backers with deep pockets.Looking into the future as the frequency of CGI movie releases by major studios increases, the intensity of ambition and one upmanship between studios will rise inflating budgets and reducing margins.So, we would rate the intensity of competition between existing players as high.We will summarize the competitive scenario in this grid.Threat of New EntrantsHighBargaini ng Power of SuppliersMediumBargaining Power of BuyersLowThreat of SubstitutesMediumRivalry among competing firmsHighAs you can see, Disney is functioning within a dynamic environment with a fairly high degree of uncertainty.We have tried to analyze the reasons behind Disneys acquisition by breaking down the reasons of why companies go for MA. Given below is a pictorial representation of the same,Reason 1 To Increase Market PowerWhen a firms size, resources and capabilities increase, it increases its ability to compete. With the acquisition of Pixar, Disney gains access to Pixars pool of talented artists and creative and technical teams. These artists and content developers are big assets in this industry as good talent is hard to find and harder to replace. With the increase in resources, Disney Pixar combine can create more movies per year potentially resulting in a significant value addition to Disney.Reason 2 Horizontal AcquisitionCompanies go in for acquisitions of firms compet ing in the same marketspace for obtainingCost Based SynergiesRevenue Based SynergiesThis is an obvious case of the latter. Pixars last six movies have reportedly earned more than $ 2.5/3.2 billion in total whereas Disneys last movie Chicken Little was only a command success. Disney plans to exploit Pixars creative and technical teams in combination with its well established and huge distribution system to increase its revenue. Disney in recent years have been unable to connect with its audience and hence create movies that have become blockbusters to the tune of Pixars movies. This acquisition will help Disney leverage Pixars content generation expertise with Disneys distribution expertise, helping them realize the maximum amount of revenue from both the domains.Reason 3 Cost of New-Product Development and Increased Speed to Market innate development of a new product, CGI movies, in this case is risky. From Pixars point of view, they were an independent studio without the monetary muscle of a media giant like Disney, this would mean that Pixar is likely to be conservative with the b