Disney and Pixar Disney's Acquisition of Pixar Essay

Disney and Pixar

Disney's acquisition of Pixar in 2006 resulted in many headlines and opinions. The main reason for the acquisition was Disney's reluctance to lose its ties with the new giant in animation, while its own opportunities were waning because a lack of technology and innovation. The acquisition was therefore based upon Disney's drive to maintain a relationship that has historically proven to be profitable, while also maintaining its own health in a market where its traditional artistic as well as leadership style was no longer viable. In order to analyze the factors behind the acquisition, three main areas will be considered: Analysis and Re-Design; Constraints and Risks; and Market Opportunities and Recommendations.

Analysis and Re-Design

The decision to integrate Pixar with Disney was, as mentioned above, based upon the potential of the latter to improve the market position of the former. According to Gayton (2006), the previous relationship between the companies was one of production-distribution. Via this model, production capital was yielded to Pixar, while Disney received attractive distribution fees. As Pixar grew, this arrangement became less favorable, as the company was able to generate its production and distribution capital more cost-effectively from firms other than Disney. This trend was based on the widespread success of Pixar's animated films. This resulted in the risk of Pixar striking a distribution deal with one of Disney's competitors, which drove the need for an alternative. Hence, the acquisition of Pixar was of "strategic importance" to Disney, as Gayton (2006) mentions.

According to Gayton, a large amount of Disney's financial success relies on its involvement in motion pictures. The strategic importance of Pixar's advanced technology and innovation to Disney's "family entertainment" brand can therefore not be underestimated. While Disney's animation component proved wildly successful in the past, the problem was that it mainly relied on outmoded technologies that took much longer than newer, computer-based technologies to complete a film. Disney's older animated films were for example cell animated, where the animations were drawn by hand. In Pixar's business the films and images were digitally created, not only resulting in shorter production time and lower labor intensity, but also in a better viewing experience for the audience.

Hence, Disney's market position relied heavily upon its continued relationship with Pixar. The main driver for the acquisition was then also the risk that Pixar might leave Disney and search for other studios to collaborate more const-effectively with it. Competitive advantages would also be related to the inclusion of Steve Jobs on the Disney Board. Gayton refers to him as "one of the most creative and visionary leaders" in the industry. Strategically, the acquisition of Pixar was therefore almost mandatory.

Gannon (2007) raises another important point in the consideration of whether or not to proceed with the acquisition of Pixar. The price ($7,4 billion) as opposed to the company's market value. The suggestion is that Disney's stock could be undervalued, while Pixar's is overvalued.

Another issue is the possible alternatives that Disney could have considered for its acquisitions. Gannon (2007) for example mentions that Disney's true value lies in its aim of becoming a "diversified entertainment" company. The author suggests that it would therefore make more sense to build animation, theme parks, the Disney Channel, and other existing features focusing on children rather than focusing on distribution items such as films. The author suggests alternative examples such as toy makers, video game publishers, or licensing companies, rather than choosing a company such as Pixar, which focuses primarily upon films.

The main suggestion is that Pixar may not be as good a deal for Disney as the company might believe, and that other mergers and acquisitions should be considered and compared as possible alternatives.

Two years later, Barnes (2009) indicates that Disney has indeed begun to diversity its products and presence across the country, most notably by the re-design of its Disney Stores. In favor of a more non-traditional approach to both animation and business, the rows of toys and apparel on display in these stores to date, were to be replaced by high-tech items, and incorporate a wide range of recreational activities. The vision with this was to attract children not only to visit, but to stay at these stores longer. The long-term aim was to bolster the company's income.

Jim Fielding, the president of Disney Stores Worldwide, indicated his drive to differentiate the stores from others in the market by using an innovative approach. The stores will then include theaters for children to watch film clips, participate in karaoke, or chat live with Disney Channel stars.Computer chips were to activate features such as Cinderella's "magic mirror." Other interactive features include a birthday animation and Christmas features.

It is interesting to note that there was not universal agreement regarding the makeover. Some board members at Disney for example emphasized the possibility that parents might be encouraged to use the stores as day care centers, while others noted that the entertainment might be the main attraction feature of the store, with few customers buying anything. The president however emphasized the need to take risks in order to differentiate the company within the market.

The most important driving factor for the acquisition of Pixar is therefore not only their advanced technology in terms of making films, but also their focus on innovative products and ideas to attract future customers and retain current ones.

2. Constraints and Risks

The most important constraint has been indicated above, by means of the disagreement regarding the precise form that innovation and re-design should take. The relatively mild dispute related to this issue is indicative of the widely different corporate cultures inherent in the two companies. Disney, having existed since the 1940s, was built on a very traditional corporate structure, with top-down leadership and continual leadership involvement in the creative process. Pixar, on the other hand, has a culture that focuses on encouraging innovation by means of a more collaborative process that assumes employees to be equal and innovative on their own. It is a type of "hands-off" approach that focuses on cultivating creativity by not dictating to employees. Indeed, even junior animators are allowed to provide a creative opinion regarding any of the products created by the company. Integration between the hierarchical culture of Disney and the inclusive culture at Pixar could therefore present a problem.

Taylor and LaBarre (2006) indicate precisely how non-traditional Pixar's corporate culture is by comparing it to the traditional Hollywood model of directorship. Pixar for example represents a model of a "tightknit company of long-term collaborators." They remain together in terms of a long-term contract, which gives them the opportunity to learn from one and other and as a result improve each subsequent production.

In contrast, the typical Hollywood director collaborates with others on individual projects, moving on to other projects and new collaborators as each finishes. Employees at the company function as long-term affiliates, al contributing to projects across the studio, rather than just individual products.

The dean of Pixar University, Randy S. Nelson, is of the opinion that Pixar's critique of the industry standard of working together has resulted in its ability to create a long line of animation success. The main reason behind this is the ability of the Pixar team to work together, especially when the pressure is particularly high. The long-term relationship among employees has brought with it an ability to work well together. According to Mr. Nelson, this feature only occurs towards the end of the typical Hollywood production -- once the collaborators have learned how to work together effectively, the contract is at its end, and a new collaboration begins the cycle again. Pixar's main business strategy is therefore to work together and support each other, especially during difficult, high-pressure times.

This strategy, when merged with Disney's more traditional approach of superior rather than supportive and collaborative leadership, could become problematic in terms of cultural clashes. However, it must also be mentioned that Disney has evolved over time, and that the structure is no longer as strictly hierarchical as it was during the company's early years.

What the company has however done to handle this problem is creating an inherently separate structure, where the two companies still work and function as individuals, and where coherence takes place only on a loose, occasional basis. The risk involved in this strategy, on the other hand, is once again that the company could find it easier to separate in the future, which would sacrifice the financial and innovative strength of the collaboration.

The cost issue has been addressed in the first section, but deserves mention in terms of the risk factor as well. Writing in 2005, Holson notes that Pixar was valued at about $5.9 billion at the time when negotiations for a possible acquisition began. Even at this price, the author notes that an acquisition would be materially expensive. The risk factors of not collaborating are however potentially more serious than those faced when the companies do merge.

La Monica (2006)….....