To: Shamsud Chowdhury From: Regan Hines
Date: November 1, 2012 Re: The Walt Disney Company and Pixar Inc.
Issues: Robert Iger, CEO of the Walt Disney Company, believes that in order for Disney to be successful in the future they must transition away from hand drawn cell animation to Computer Generated (CG) animation technology. Disney has been reliant on Pixar, the leader in CG animation, for most of its recent animation revenue and the co -production agreement between Disney and Pixar will expire within 1 year. Iger must dec ide what a deal with Pixar will look like and if it makes most sense to ac quire Pixar. Analysis: Pixar has a number of strong capabilities, some of which Disney does have and some which Disney does not possess. Pixar is the leader in Computer animation technology where Disney has focused on traditional 2D animation. Research and Development has been a large focus of Pixar and has led to the creation of many proprietary software systems (RenderMan, Marionette, and Ringmaster). This focus on Research and development means that Pixar’s employees are highly technically skilled (most employees hold PhDs) where Disney’s Employees lack CG skill. Where Pixar’s str ength lie in innovation and creation, Disney’s strength comes comes from their vast distribution network and experience in the Movie Industry. Together it is clear that these companies could capitalize on the animated movie market. There are a number of ways Disney could move forward. Below I discuss the alternatives. alternatives. Internal Development: Disney could focus on developing competing CG technology internally and forget about partnering with Pixar. This option would require acquiring both human and technology assets and would be very costly. They also face very intense competition from other companies who have already proven to be successful in this capacity such as Pixar and DreamWorks. DreamWorks. Strategic Aliance with Pixar: As the lines of communications have been reopened, Disney has the opportunity to discuss extending the Disney-Pixar co-production agreement. In doing so Pixar w ill gain access to the Disney distribution channel and Disney will gain access to Pixar’s talented employees and superior technology. The challenge with this option is defining the terms of t he agreement. Disney wanted to fully fund productions and own the right to the movies where Pixar believed they should retain movie rights leaving Disney with only a distribution fee. This option poses a large amount of risk as Pixar is entertaining offers from o ther production companies. Acquisition of Pixar: This option eliminates the risk of losing Pixar to other production companies and revitalizes Disney’s animation department with the access to Pixar’s technology and valuable human capital. This deal would also mean that Steve Jobs would become a very large Disney Shareholder. With a seat on the Boar d of Directors, Jobs could be very valuable to Disney. There are; however, risky aspects to the acquisition of Pixar. The proposed acquisition through exchange of stock will lead to the dilution of Disney shares and decreased earnings per share. Also, if Pixar’s creative talent decides to leave the acquisition could be a waste of money on a massive scale. Recommendations: It is my recommendation that Disney acquire Pixar. The acquisition will support the future growth of Disney and fully capitalize on the available market. In acquiring Pixar Disney will have eliminated a major competitor and will likely expand and attract new customer segments. The benefits of acquiring Pixar are numerous and include recruiting talented employees (including Setve Jobs and othe r Pixar Executive Members), access to new technology, and the reinforcement of Disney’s competitive advantage through owning the leader in CG animation. It is unclear that Disney if could achieve these benefits by partnering with Pixar and offering Steve Jobs a seat on the Board of Directo rs but this option leaves the door open for competitors to acquire Pixar . This is why Disney should aggressively pursue acquiring Pixar.