Global Mega-Mergers: Disney and Pixar - Case Study Example

Mega-Mergers r and Mergers Disney and Pixar Introduction Disney acquired Pixar in 2006 at the cost of $7.4 billion. Walt Disney is a rebuttable company founded in October 1923 by Disney brothers. The company emerged as the world largest, competitive company in the field of high end family entertainment. The company had diversified its businesses, it also had multiple and distinctive brands. The company began its cartoon entertainment with famous cartoon Mickey mouse. On the other hand, Pixar started in 1979 as a Graphics Group, a third of Computer Division own by Lucasfilm. Pixar was known as Computer Division before it was sold to Steve Jobs in 1985. Steve Jobs took over the company at the cost of $5 million and renamed it Pixar. Background The two companies came together in 2006 after the acquisition of Pixar by Disney at the cost of $7.4 billion. Before the acquisition of Pixar by Disney in 2006, the two companies had been in a joint venture. The joint venture of the two firms involved three pictures that began in 1991. The working environment was not easy for either of the firms and more on Disney Corporation. The industry was quite complicated and competitive for Disney because creativity only ruled it. As such, Disney was not able to bring together the right combination of talent in an effort to create blockbuster animated films. Their joint venture that led to the production of three pictures which began in 1991 was working well. Prior the acquisition of Pixar by Disney Company, Pixar was renowned, successful company in Hollywood. In their agreement, Disney provided their stock (amounting to 7.4 billion) to Pixar in an exchange of Pixar shares. Time Warner and AOL Introduction American Online; the inception of the company began in 1985. The company provided shared services via dial-up modems. Many of its customers, however, were limited to the company’s services. AOL was the first and the only firm to offer online services that require the use of software as opposed to its competitors that used terminal standard program. The unique services provided by AOL made it possible for computer illiterate personnel to use a computer. Time warner was started by Warner Brothers; the four Warner Brothers later began to produce their films in 1925. The launch of cartoon series by Time Warner started in 1930 just after the company went public. Some of the films launched by the company include Daffy Duck, the Looney Tunes, and Bugs Bunny. It was in 1989 that Warner Brothers changed to Time Warner after Warner was acquired by Time at the cost of $14 billion. The acquisition of Warner Brothers by Time saw the incorporation of many facilities and transformation of the company into high-end multimedia company. Background The merger of the two firms began in January 2002, it was deemed as the largest merger ever in the History. The cost of the merger was valued at $166 billion, and so AOL, the largest and most prominent Internet services provider merged with Time Warner. On the other hand, Time Warner is one of the greatest media houses featuring movies, magazines and cable networks. The investors saw that the merger of AOL and Time Warner was a good idea. AOL capabilities to provide high-speed Internet was a good idea because they could provide services to Time Warner cable television. Additionally, Time Warner could provide films and news content to many AOL customers (Hirschey 2003, p. 99) Reasons for Merger Disney and Pixar Disney operates under five separates; Resorts, Media networks, Disney consumer products Parks and the Walt Disney Studios. Disney is the best company in the world but it has and still faces stiff competition. The company is also facing threats from companies offering the same products. Porter’s five forces analysis clearly explains Disney’s competition in the entertainment industry. Degree of rivalry Disney operates in a highly consolidated industry. The rivals are diversified and proven. As such, competition is high between the firms in specific sectors. Disney, however, operates separate entertainment industries, it is a conglomerate. Some of those sectors where Disney operates have little or no competition. Therefore, companies, including Disney, competing in various industries can leverage their branding and lower the level of competition. The degree of rivalry for Disney is medium. Threats of substitutes (medium) Consumers can decide what to have for entertainment. They have many things to substitute the products or services offered by Disney. While there are many substitutes for resorts or hotel entertainment, a consumer can decide to stay at home rather than go to the resort. On the other hand, Disney offers cable network entertainment with channels such as ESPN. While there is no substitute for ESPN, a consumer can switch to other cable network providers. This makes threats of substitutes medium. Threats of new entrants (medium) The new entrants to the industry are mostly of lower costs and structures. But, there still major players in the industry operated by Disney. For example, Marriott and Hilton are some hotel industry with a large market share. There are also new industries that have gained entry to the industry though they operate under low costs. Power of suppliers (low) Disney is a rebuttable, large and a company that has been operating for many years. The company also dominates movie industry. Disney being a conglomerate has vertically integrated in most of the industries. As such, the power of suppliers is low. Power of buyers (high) The buyers can decide either to buy the product or leave it. In addition, products offered by Disney are not necessities because of this; consumer can do without Disney’s products. A number of reasons prompted the merger of Disney and Pixar. One company had facilities or qualities that the other firm lacked. For example, Pixar need an exposure of theme parks, characters, and other commodities. Their main objective was to protect their creative culture and increase their profits. On the other hand, Disney lacked technicalities in the animation industry. However, Pixar the company headed by Steve Jobs provided those technicalities. Pixar was to provide hi-tech required in the industry financed by Disney Company. Additionally, Disney studios were less competitive as compared to other companies in the same industries. The only solution was acquisition of Pixar to revive Disney studios (DePamphilis 2007, p. 164). AOL and Time Warner Time Warner required fast and effective way of distributing their services and products to the customers. One way of achieving this was the creation of internet branch by the company. However, it emerged that Time Warner required significant amount of money to set up distribution networks for their services and products. The best way to avoid huge financial cost required to set up distributions channels was combination or merger with other company. AOL had all the requirements for Time Warner. AOL, the largest, Internet service provider was a solution to Time Warner problem of service distribution to the consumers. Additionally, AOL had a significant amount of subscribers for Internet Services. Studies show that the AOL had close to 30 million internet subscribers. Time Warner considered most of the customers of AOL as untapped customer base. It therefore provided a potential growth for the two firms because of the increase of revenues and expansion of customer base. Research also reveals that the merger Time Warner and of AOL was to have a piece in the Internet use in the future. No company could survive alone. For example, despite that AOL provided high-speed internet, the company could not provide other services deemed future valued. They could only give its customers an opportunity to send, read their e-mails and Web surfing. Such services were common because there had been available since the first use of the Internet. AOL had no other strategy to make changes for future generation. Conversely, Time Warner provided broadband access, this meant that the speed of the Internet increased and also allows completion of more work. Broadband access is mainly provided by cable TV companies and telephone companies. One of the cable TV providers is Time Warner; they could provide broadband services to AOL customers. Time Warner could also benefit from AOL high-speed internet because previously. The company had failed miserably to provide internet services that could have projected delivery of services to consumers. As such, the two firms needed each other more than anything. Porter’s five forces analysis of Time warner Internal rivalry (high) The company faces serious competition from other major competitors in the industry such as News corporations, the Walt Disney, and NBC Universal Media. Time Warner also faces competition in the movie industry dominated by Walt Disney, News Corp’s Twentieth Century Fox, Warner Bros, NBC Universal Inc., and Sony/Colombia. The mentioned studios accounts for 80% of the movie industry. Competition in the filmed entertainment industry is dominated by a few corporations. On the other hand, Time Warner faces competition from cable providers such as Home Box Office, HBO. For example, HBO has close to 114 million subscribers from around the globe as per December 2012. Barriers to entry (high) It is not easy for players to gain entry to the industry because the industry is characterised by high competition. The big companies in the industry use their capabilities such as brand name, special distribution channels and management experience as a benefit over new entrants. Buyer power (low) Films and TV are common products and in the entertainment industry. As such, the buyer power is low. For example, Warner Home Video increased its market share of DVD and Blue-ray sales to 21%. As such, the theatres and distributors are left with less bargaining power. Substitutes and compliments The existence of industries offering the same products and services makes competition tense for Time Warner. Online entertainment companies such as Netflix and Hulu provide online entertainment to subscribers at a small fee. Additionally, the two companies have a large content of movies on their libraries that can be access for a small fee. Cable network provided by Time Warner is a bit expensive as compared to the fee paid on subscription to Netflix and Hulu. As such, threats of substitutes are high to Time Warner’s products. Disney and Pixar Pre-merger stages Prior the acquisition of Pixar by Disney, the two firms had partnered together in an effort to develop quality movies. In 1991, the two companies were in agreement to develop three animated films. Pixar did the production of the movies because they had technicalities that Disney lacked. On the other hand, Disney did marketing and distribution of products agreed by the companies. The alliance of the two companies saw the success in production and sale of Toy Story in 1995. Changes were however made by the two firms in 1997; the alliance made in 1991 was changed to Co-production agreement. Five animated movies were produced by Pixar and Disney based on the Feature Film Agreement. The five animated movies were Monsters, cars, Incredible, Finding Nemo, and A Bug’s Life. Based on the Co-production Agreement made in 1997, the costs meet on production was financed by both parties. Disney did the distribution of the five films. However, the agreement by the two firms ended after the call by Pixar to add Toy Story2 to five animated films. Disney disagreed citing that Toy Story2 was not part of the agreement. The two companies tried to renegotiate the agreement in 2004. However, Pixar pointed out that Disney was to get 10% to 15% of the distribution fee. Pixar was also to take control of the products and have ownership of the films. The two firms could revive the old agreement; Pixar cited that it did not get a reasonable share of revenues. Despite the end of their agreement, Pixar was a high performing company as compared to Disney in 1990s. A study by Patterson (2013) reveals that the company made a successful release of Toy Story in 1995 with only 110 staff members. Additionally, the company spend a small amount of the administrative expenses, approximately $3 million. The author pointed out that Pixar motivates its employees well by providing them with work opportunities. For example, while Disney fires and hires employees based on the demands of the firm, Pixar retained their employees. Pixar provided work to their employees such as Research and Development whenever there are no film projects. Pixar emerged as the most competitive company in the creation of animated films. The success was attributed to technology and human capital. The company’s staffs were treated with care. In comparison with studios like DreamWorks, Pixar made $200 million more in box office sales that DreamWorks. Disney, on the other hand, experience some difficulties prior the acquisition of Pixar. First, the company was successful in the release of The Lion King in 1994. Additionally, the company launched Disney online after acquiring ABC. However, in 2002 and 2003, Disney incurred a loss of $158 million. The loss was attributed to unsuccessful films like Brother Bear, Treasure Planet and Fantasia. The list below indicates some movies from Disney that contributed to company’s loss of revenue. Source Gadkari Disney and Pixar Post-Merger Stages Disney bought Pixar at a cost of $7.4 billion despite their long differences. This was a deal that left many thinking that it was a mistake for Disney to take over Pixar or Pixar to accept the deal. Prior the merger, the two firms had a sense of bitterness, and it was, however, surprising to find them operating together. Additionally, many analyst and investors were asking many questions regarding the huge amount used by Disney to acquire Pixar. Some people pointed out that most media acquisition have never been successful. However, a few years down the line, the merger saw the roll out of “Wall-E” animated love story at a cost of $180 million. Disney stock is said to have risen significantly by 28% after the merger with Pixar. The increase of Disney’s stock is attributed to the confidence of the investors that saw Pixar as a saviour. Disney could make use of Pixar technology, and more on computer generated characters to revive its vast industry. The merger of Disney and Pixar is a lesson to many leaders that have problems combining differing cultures (Barnes 2008). AOL And Time Werner Pre-Merger Verma (n.d., 4) explains that many believed that the survival of media industries depends on the conversion from traditional to new media sector. The media industry can make use of the infinite customer base provided by the internet. Time Werner Company thought that it would be successful in merging with AOL. The stock prices of AOL rose significantly in a period towards 1999. After 1999, stock prices began fluctuating at a mean of $60. Before the merger of AOL and Time Warner, the subscribers of AOL amounted to 27 million. They approximate to 40% of the U.S. online users. The competitors of AOL were CompuServe and Prodigy. The company however grew significantly 8 years later after inception. The revenues of AOL changed to advertising and e-commerce. Previously before e-commerce, the customers depended on the subscriptions and time usage of the internet. AOL changed its feature right from Internet provider to media outlet. This saw the increase of its stock value by 1,468% right from 1996 to 2001. AOL and Time Warner made the announcement of the merger in 2000. The two firms had clear objectives of merging. The idea of merging was to improve the provision of interactive media to consumers and to expand the scope of media service. The synergies between the two firms suggested that; Time Warner entertainment, news and broadband technology would combine with the greatest Internet services, technology, and AOL infrastructure. The two company’s resources including journalist would be effective in penetration of new markets and management of the new company. Hirschey (2003, p. 99) point out that the merger of AOL and Time Warner so the increase of stock prices of both firms. Time Warner stock prices rose from 60 to 102. On the other hand, AOL stock price also increased significantly to 95 right from 75. However, there was a change in value of stock prices when the investors made a move to value the new firm. The merger of the two firms will increase the growth of interactive medium and development of businesses. AOL and Time Warner believed that they could assist each other in the creation of more products that could improve consumers’ satisfaction. Time Warner believed that they could work together with AOL in provision of broadband technology to consumers. On the other hand, AOL was to help Time Warner make changes of their distribution channels to digital. Failure of AOL and Time Warner merger Many people thought that the two companies could work together effectively. Verma (p. 11) shows that the two firms were not equal. Additionally, the stock of AOL was overvalued during the merging with Time Warner. Overvalue of the stock resulted from the Internet bubble. The Internet brought many “dot-coms” that were overvalued just like AOL in 1990s. Overvalue of dot-coms happened because the investors thought that they could make it in the industry just like blue-chip firms. AOL and Time Warner shares were valued at the same price because they were believed to match. Additionally, the two got the same power and voting rights. However, the value of the two companies currently does not match. Time Warner is high valued that AOL. Studies also reveal that the stock of the two firms after merging was valued at $90. However, their value of stock fell significantly down to $10 in 2003. Currently, it has moved up to $13. The view that AOL is less valued as compared to Time Warner forced Time Warner to revert back to their name, it remained Time Warner. Additionally, due to the fact that the two companies were unequal, the members of the board constitute of Time Warner members only. AOL directors on the board were replaced by the new directors from Time Warner. The failure of AOL and Time Warner was also attributed to the failure of the two to implement their visions. Varma (11) explains that the two firms had no ability of identifying the new channels in the digital market. The existence of Internet telephony and voice over IP was a good opportunity for the firms to venture. However, they failed miserably to recognise it. Furthermore, the two firms could promote and contribute to the production of music platforms just like other industries such as Apple. AOL got an opportunity to expand to the international countries, with this opportunity; it was easy for AOL to offer broadband technology to consumers overseas. However, phone companies took over this idea before AOL took a step. Lessons A small company can emerge as the greatest supporter of a large company. For example, the acquisition of Pixar by Disney assisted Disney to improve some of its animation studios. Another lesson is that a larger and strong financial company can lack technicalities to improve its production. Disney is the greatest company far more than Pixar, despite that, their production lacked quality required by customers. It is because the company did not motivate their employees like what Pixar did. It is important to have motivated human resources for a success of the company. Rivals can work together and share common interest and qualities just like Disney and Pixar. It is important for any company to consider the vision and make use of it to achieve the targets. Failure of AOL and Time Werner is attributed to lack of vision. Additionally, management team should try to identify some opportunities that a firm can exploit so as to emerge as a greatest competitor. AOL and Time Werner failed to recognise the trend of Voice over IP providing an opportunity to other companies. A company should make use of what they are proficient whenever they get an opportunity to expand they market share. AOL failed to introduce broadband technology in the international market despite having an opportunity to operate overseas. Research and development are important for a company because it provide an opportunity to identify the future needs. References Barnes, B 2008, ‘Disney and Pixar: The Power of the Prenup,’ The New York Times, 1 June. Bingham, A, Spradlin, D, Williams, L………Wanger, J 2011, Create Competitive Advantage with Innovation (Collection), FT Press, New Jersey. DePamphilis, D 2007, Mergers, Acquisitions, and Other Restructuring Activities, 4E, Academic Press, San Diego. Gadkari, M n.d, Disneys Acquisition of Pixar, Viewed on 22 February 2015, http://www.scribd.com/doc/41502628/Disney-s-Acquisition-of-Pixar#scribd. Gaughan, AP 2005, Mergers: What Can Go Wrong and How to Prevent It, John Wiley & Sons, California. Hirschey, M 2003, Tech Stock Valuation: Investor Psychology and Economic Analysis, Academic Press, San Diego. Jensen, K 2013, The Trust Factor: Negotiating in SMARTnership, Palgrave Macmillan, New York. Patterson, L 2013, Strategic Management, Walt Disney-Pixar Analysis. Verma, KK n.d, The AOL/Time Warner Merger, Where Traditional Media Met New Media Read More