Friendly Takeover: Acquisition of Walt Disney of Pixar Studios Harvard Case Solution & Analysis

Introduction

             This paper attempts to address the merger that took place between the Walt Disney Company and the Pixar Studios. The case taken in this regard is ‘The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?. It covers all the crucial areas associated with a friendly merger transaction. Walt Disney Company had been relying on Pixar Studios for its business and the co-production agreement was set to expire in the year 2006. The importance of the animation business for Walt Disney, forced Bob Iger to assess the option of acquisition of Pixar Studios. First of all the case describes a number of new concepts related to mergers which are briefly defined below.

Vertical Integration, Relationship Specific Investments & Downstream free riding

            Vertical integration strategy is a growth strategy under which a business grows up or down within its supply chain, for example by becoming its distributor or its own supplier of raw materials. Secondly, the concept of relationship specific investments is important in understanding relationship specific investment such as in this case. Lastly, the downstream free riding is defined as the strategy of the companies under which the companies free ride over their competitors and they become capable enough of creating competitive advantages on their own (Porter, 1980).

Independent & Exclusive Relationship between Pixar and Walt Disney

            The total value of the deal was set to be $ 7.4 billion and it would be a stock deal. Each share of Pixar Studios would be converted to 2.3 shares of the Walt Disney Company. Furthermore, if the combines value is calculated then it could be seen that after the incorporation of synergies the wealth of the shareholders is not diluted (Anderson, 1994). This means that the value of the synergy would be high if both the companies form an exclusive relationship.

            There were many reasons for this, such as once the deal would be completed both the companies can maintain the same employees and also the current animation facilities. Along with this, after the merger takes place, Pixar would focus on its core competency of producing best animated films while Walt Disney Company would be marketing and distributing those animated films. Disney is the only producer of films and a long & fruitful relationship has been maintained with Pixar over the years and now if Disney continues to operate as a standalone company then it would need to make significant investments and also face many challenges.

            If we compare the performance of both the companies as shown in except spreadsheet it could be seen that Pixar has been performing impressively due to its best animated films, cutting edge technology and world class talent. Furthermore, the profitability of Pixar has been increasing significantly and any acquirer will have to pay at least $ 6.5 to 7.5 billion for Pixar Studios. Therefore, the worth of the exclusive relationship is more rather than if they operate as standalone companies.

Realization of Value in Exclusive Relationship

            According to the case, Steve Jobs has suggested a new contract and if gets accepted then the main responsibility of Disney would be to distribute the Pixar’s animated films. The revenue of sale would go to Pixar after 10% deduction by Disney. The profitability of Pixar would reach at $ 467 million. Therefore, it could be said that if the exclusive relationship is not formed, both the companies will have to lose a lot. According to the William’s Theory, there would be major problems that would arise on the part of the both companies if they operate as standalone companies (Bock, 2002). This is because then both will fight to maximize their individual values in the market.

Friendly Takeover Acquisition of Walt Disney of Pixar Studios Case Solution

            Therefore, if both the companies merge, then they can take the advantage of their relative core competencies (Mintzberg H. and Quinn, 1939). Walt Disney can acquire the core expertise from Pixar that is required in making the computer motion pictures. On the other hand, Pixar would also pay 100% attention in the development of the computer animation. The wastage created due to distribution and merchandise can also be avoided by Pixar. Merill Lynch has termed the merger as a strategic fit for both the companies. The current market value of Pixar Company is $ 5.9 billion and Disney will have to pay a purchase price between $ 6.5 billion and $ 7.4 billion.......................

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