The Walt Disney Company and Pixar: To Acquire or Not to

Acquire?

By:
Juan Clar (Nemo)
Alex Radcliffe (Frozone)
Prasoon Tripathi (Woody)
Gaurav Sharma (Lightning McQueen)
Mark Spaisman (Mike Wazowski)
David Stephens (Buzz Lightyear)

Pros and Cons of a Merger between Disney and Pixar

From a strategic standpoint, Disney would be making a wise decision to merge with Pixar. By
examining Pixars performance since its inception, it is clear that they have put together an

incredible team of technical and creative people. The proprietary software developed by Pixar
(RenderMan, Marionette and Ringmaster) has made the firm the industry leader in the use of
computer generated animation - the seemingly preferred medium for animated motion pictures.
From Exhibit 1 in the case, we can see that all computer generated motion pictures produced by
Disney, Dreamworks, Warner Brothers and Fox have outperformed their respective companys
total box office average with the exception of Antz, Dreamworks first animated feature. This
shows the competitive advantage that computer generation has over hand drawn animation.
Pixar has been able to outpace these studios at the box office while at the same time employing
fewer animators for each film. Not only has Pixar outpaced their competition at the box office,
but theyve also done it employing fewer animators for each film - This gave Pixar employees
more time to focus on story and character development, as well as fine-tuning visual details
which shows up in the form of box office revenue.
If Disney decides to pass on a merger with Pixar, the latter is likely to make a deal with another
distributor with more favorable terms. In this sense, Disney has essentially been creating their
own competition if Pixar chooses to take another direction. Additionally, Disney has received the
lions share of the profits from the films they produced together with Pixar and has a five percent
stake in the company, so they have had a stake in Pixars success for some time now. A merger
would allow Disney to be even more invested in Pixars success and would likely benefit both
companies due to the additional resources Pixar is likely to have allocated to them for future
projects so as to boost Disneys bottom line more significantly than what a minor stake in the
company could do.
A significant downside of a merger from Disneys perspective is that there is no guarantee that
Pixar employees would stick around after the transaction is complete. Eisner had once remarked
that Lasseter was the only difference between Disney and Pixar and while the case doesnt
make it clear if hed be required to stay on in the event of a merger (he signed a 10-year contract
in 2001), this could be a huge strategic blunder for Disney if all Pixars talent was able to just
walk out the door the next day.
Additionally, a history of disagreement regarding contracts and negotiations exists between
Disney and Pixar. Producing Toy Story for Disney didnt turn out to be such a great deal for

Pixar; the company received just $56 Million of the over $350 Million in box office and video
sales despite being responsible for any cost overages and losing distribution rights to Disney. The
movie was a success in large part because of Disneys distribution networks and aggressive
marketing campaign, which Pixar was unable to duplicate in its early years. The tension from
past contracts and negotiations may be a significant con of a merger should it lead to personality
differences and conflict between Pixar and Disney.
From Pixars perspective, a drawback of merging with Disney would be that they could almost
certainly get a better revenue sharing deal from one of Disneys competitors - Sony, Warner
Brothers and 20th Century Fox wouldnt have nearly the negotiating wiggle room that Disney
would. However, a pro for Pixar merging with Disney is that, while Pixar pioneered a lot of the
technology used in computer generated animation, the barriers to entry into this genre were
becoming much lower and many more players were getting into the market. Disney Pixar would
then be better positioned to beat the competition with their massive distribution network.
For these reasons, negotiating leverage between the two would be about equally shared. While
Disney is a much larger and more established company, they have relied heavily on the
production capabilities of Pixar, with Pixar contributing a full 10% of Disneys revenue and
over 60% of their total operating income between 1998 and 2004.
A significant possible post-merger integration issue is the culture clash that would likely occur
between a small, independent studio... [and]... a behemoth corporation. Similarly, it was feared
the effect that an at times ornery Steve Jobs would have in a Disney boardroom. Another
potential post-merger integration issue would be if Pixar had a high level of turnover due to the
merger. This would result in the likely $6.5 to $7.4 billion acquisition cost of Pixar to go towards
the ... most expensive computers ever sold.
Alternatives to a Merger between Disney and Pixar
There are several alternatives to a merger that are available to both Disney and Pixar. Firstly,
Disney and Pixar can renegotiate another contract. Disney and Pixar have had a relationship
since 1986, when the two joined forces to develop Computer Animated Production Systems.
Additionally, Disney and Pixar have had an agreement to produce 3D CG animated movies since
1991. Most importantly, both Disney and Pixar have integrated their two corporate cultures

together during their tenure of working together. Thus, while a challenging one, negotiating
another contract would be the ideal alternative if Disney and Pixar were not to merge.
Another alternative is for Pixar to sign a distribution deal with another studio, as Warner
Brothers, 20th Century Fox, and Sony are all interested potential partners. However, Disney has
significantly more resources than its competitors and a higher level of potential revenue. These
potential partners would be more willing to strike a deal with more favorable terms for Pixar, but
would be at risk if Disney and Pixar choose to renew their relationship down the road.
Disney could also reposition its animation division to better compete with Pixar. However, Pixar
utilized three proprietary technologies within its 3D capabilities: RenderMan, Marionette, and
Ringmaster. Disney utilized these capabilities throughout the length of its Pixar relationship, and
it would be very costly and take many years for Disney to develop similar technologies
themselves, putting them at a competitive disadvantage.
Purchasing more Pixar stock is another option for Disney. Disney has already become a five
percent shareholder in Pixar and has an option to pay for an additional 1.5 million shares.
Purchasing more of a stake in Pixar would allow for more buy-in on joint projects and a larger
voice in Pixar corporate matters. However, beyond the additional 1.5 million shares, Pixar would
likely limit Disneys ability to gain a more significant ownership in the company, and it is almost
certain Steve Jobs would never let Disney become the majority shareholder.
A merger between Disney and Pixar would be considered a product extension merger, as Pixars
3D capabilities would complement Disneys strategy. Thus, Disney and Pixar are strategically
related, meaning the economic value of both firms together is greater than the economic value of
these two firms as separate entities, with both firms having the ability to work with other
companies (Barney, 2011). Although potentially to a lesser extent, the same can be said if the two
were to remain in an exclusive relationship. This is because of culture, capabilities, and joint
operations that had become so intertwined through synergy, that it is difficult for competitors to
imitate.
Value Realized through a New Contract
Given that an exclusive relationship between the two companies creates a higher value, the factor
that affects the decision between common ownership and a new contract is how the synergies

between the two companies can be maximized. Both choices have a host of pros and cons that
affect these synergies. Signing a new contract means that both Pixar and Disney can focus on
their respective strengths in creativity and marketing without cannibalizing their market shares.
While this ensures each organization retains control of individual business units, there is a
potential for disagreement regarding the flow of ideas between the two companies and their
individualistic corporate cultures and goals.
Common ownership, on the other hand, can help financially by eliminating redundant positions
and ensures that the flow of information and decision making within the company is consistent.
However, this would involve establishing a new company culture for the common ownership that
is able to integrate the best of both Disneys and Pixars current cultures. This is easier said than
done and can be one of the biggest hurdles for a new company.
In addition to this, Disney officials had not only remarked Bringing Jobs and Lasseter into the
fold, would be like bringing back Walt himself but had also placed a special clause for Lasseter
in the 1997 co-production agreement (Exhibit 6 in the case). It is therefore important for Disney
to understand how Lasseter, whom it considers as a highly prized driver of Pixars success, will
fit in either of those scenarios. While a new contract would allow the continuation of Lasseters
creative achievements at Pixar, a common ownership in a large bureaucratic apparatus could
lead to his swift departure from the organization, triggering a loss of additional employees from
newly-acquired Pixar to other competitors. It is also important that such a situation is avoided in
order to prevent a replication of Disneys previous decisions that lead to the creation of
Dreamworks as a formidable competitor.
Therefore, the value of the exclusive relationship between the two companies, at the time of the
case, could best be realized by a new contract instead of common ownership as it not only
ensures retention of creative talent within Pixar but also allows both companies to retain their
corporate cultures and focus on what they do best - creativity and design for Pixar and marketing
and distribution for Disney. This maximization of synergies is supported by the fact that even
with the existing contract, between 1998 and 2004, Pixar CG movies contributed a total of more
than $3.5 billion to Disney Studio revenues and more than $1.2 billion to Disneys operating
income (Exhibits 2 and 2a in the case), which accounted for 10% and 60% of Disneys total
values, respectively.

Organization of a Combined Entity

If Disney acquires Pixar, Bob Iger and his team should give Pixar a high level of operational
autonomy, respect its corporate culture and allow Steve Jobs to manage Pixar without the
authority to infringe on other Disney businesses. In this scenario, we foresee a number of
challenges related to the nature of corporate acquisitions:
A) Culture: Disney is a large bureaucratic organization with top-down management,
an ingrained historical identity and a heavy emphasis on profitability. On the other hand,
Pixar is an open, egalitarian, highly cooperative, perfectionist and creativity-driven firm
overseen by a rather stubborn Steve Jobs. These stark differences could lead to culture
clashes. To meet this challenge, the acquired firm should retain its open space and
environment and allow increased communication and relationship-building between
employees at Pixar and the Disney parent company.
B) Equity and Governance: According to the case, a merger with Pixar would likely
take place at a 2.3:1 Disney:Pixar share exchange ratio. If Jobs accepts a stock swap, he
will gain a substantial ownership of the firm and sit on the board of directors. Given Jobs
controversial personality, Disneys leadership could face difficulties in making high-level
decisions. To address this challenge, Disney can grant Jobs a high degree of autonomy, if
not independence, within Pixars operations, while ensuring that his equity prevents him
from influencing major decisions of other parts of the business.
References
Alccer, Juan, David Collis, and Mary Furey. "The Walt Disney Company and Pixar, Inc: To
Acquire or Not to Acquire." Harvard Business School Case Study (2010): n. pag. Web.
Barney, J. B. (2011). Gaining and Sustaining Competitive Advantage (4th ed.). Upper Saddle
River, NJ: PHI Learning.