Disney Pixar - Marvel

MASTERS IN BUSINESS STRATEGY
COURSE 2010-2011

Professor: Dr. Consuelo Dolz Dolz

GESTION DE FUSIONES Y
ADQUISICIONES
Disney’s Acquisitions

Michalis Athanasiades
Alain Abadayev
Florent Guedon
Selim Ozturk
David Soriano Mc Guinness
Zhifeng Qi

Gestion de procesos de fusiones y adquisiciones: “Disney’s acquisitions : Pixar & Marvel” 2

Table of Contents

Introduction………………………………………………………………………..Pag.4

1. Context…………………………………………………………………… Pag.5
1.1 Industry Analysis……………………………………………………... Pag.5
1.1.1 Traditional Animated Film Market…………………………… Pag.5
1.1.2 Computer Animated Film Market…………………………….. Pag.5
1.1.3 Entertainment Industry………………………………………... Pag.6
1.1.4 Marvel other business…………………………………………..Pag.6

1.2 Companies Analysis……………………………………………………Pag.7
1.2.1 Disney vs. Pixar………………………………………………..Pag.7
1.2.2 Disney-Pixar Partnership Evolution……………………………Pag.7
1.2.3 Marvel Entertainment…………………………………………..Pag.8

Case 1: Disney and Pixar

2. Pre-Acquisition…………………………………………………………… Pag.9
2.1 Rationale for Acquisition……………………………………………... Pag.9
2.1.1 Research & Development………………………………………Pag.9
2.1.2 Brand Reputation………………………………………...….....Pag.9
2.1.3 Pixar’s Partners……………………………………………….. Pag.9
2.1.4 Pixar’s patents and licenses…………………………………… Pag.10
2.2 Potential Benefits / Risks…………………………………………....... Pag.10
3. Acquisition Analysis…………………………………………………........ Pag.11
3.1 3.1 Acquisition of Pixar………………………………………………. Pag.12
3.1.1 Financial Negotiations…..………………………….……….....Pag.12
3.1.2 Integration Process……………………………………………. Pag.12
3.2 Post-Acquisition Results………………………………….…..……..…Pag.12
3.2.1 Operational Consequences……………………………………. Pag.12
3.2.2 Synergy Effects……………………………………………….. Pag.12
3.3 Actual Performance…………………………………………………... Pag.13
3.3.1 Pixar’s releases (Since Acquisition)………………………….. Pag.13
3.3.2 Disney’s Position in the Computer Animated Film Market….. Pag.13
3.3.3 Future Expectations…………………………………………… Pag.13


Case 2: Marvel

4. Pre-Acquisition………………………………………………..…………...Pag.13
Rationale for Acquisition…………………………………….................... Pag.14
4.1.1 Leveraging global marketing and distribution system.....…….. Pag.14
4.1.2 Consumer Products/ Merchandise Licensing.......……………. Pag.14
4.1.3 Studio Entertainment………….………………………………. Pag.14
4.2 Potential Benefits / Risks…………………………………………….. Pag.15

5. Acquisition Analysis……………………………………………………… Pag.15
5.1 Acquisition of Marvel………………………………………….…….. Pag.16
5.1.1 Financial Negotiations………………………………………... Pag.16
5.1.2 Integration Process…………………………………………… Pag.16
5.2 Post-Acquisition Results……………………………………………… Pag.17
5.2.1 Operational Consequences……………………………………. Pag.17
5.2.2 Synergy Effects……………………………………………….. Pag.18
5.3 Actual Performance………………………………………………........Pag.18
3.3.1Marvel current situation……………………………….Pag.18
3.3.3 Future Expectations…………………………………. Pag.20
6. Conclusion………………………………………………………………... Pag.21
7. References and bibliography…………………………………...................Pag.22


Introduction

"Animation has always been the heart and soul of the Walt Disney Company and it is
wonderful to Bob Iger and the company embrace that heritage by bringing the outstanding
animation talent of the Pixar team back into the fold."

- Roy Disney Jr. in 2006

As Walt Disney Company’s former longtime senior executive Roy Disney Jr. mentioned,
the animation is remarkable in many respects of company’s business plans. The Walt
Disney Company is the largest media conglomerate in the world in terms of revenue Walt
Disney Productions established itself as a leader in the American animation industry before
diversifying into live-action film production, television, and travel.

Disney, perhaps better than any other company on the planet, can perform "3D
Branding". The 3D approach realizes that brands grow as people interact with them and
contribute to the story. Walt Disney did this early on with its theme parks. Furthermore, 3D
branding realizes that every company should make themselves easy to find and easy to
buy. With this respect, Disney established the acquisitions of Marvel Comics and Pixar
Studios in order to increase its brand reputation, strength and profits as well as reduction of
costs which are deeply analyzed in the report.

The report highlights a brief history of the animation industry as well as the evolution of
computer animation. It also attempts to give a short description of the Walt Disney
Company, Pixar and Marvel Comics. Furthermore the report examines the advantages and
drawbacks of the partnership agreement between Disney and Pixar for producing and
distributing animation films. It describes the rationale behind Disney's acquisition of Pixar
and Marvel and the pre-acquisition process in terms of benefits and risks. Finally it tries to
give a brief account of the post-acquisition and present situation of the companies.


1. Context

1.1 Industry Analysis

1.1.1 Traditional Animated Film Market

Traditional animation, (or classical animation, cel animation, or hand-drawn animation) is
an animation technique where each frame is drawn by hand. The technique was the
dominant form of animation in cinema, until the advent of computer animation. The
techniques of an animation process that originally depend on cels in its final stages, but
painted cels are rare today as the computer moves into the animation studio and the outline
drawings are usually scanned into the computer and filled with digital paint instead of
being transferred to cel and then coloured by hand.

It is now possible for animators to draw directly into a computer using a graphics tablet or
a similar device, where the outline drawings are done in a similar manner as the would be
on a paper. The Goofy represented Disney’s first project based on the paperless technology
available today. Some of the advantages are the possibility and potential of controlling the
size of the drawings while working on them, drawing directly on a multiplane background
and eliminating the need of photographing line tests and scanning

Though traditional animation is now commonly done with computers, it is important to
differentiate computer-assisted traditional animation from 3D computer animation, such
as Toy Story and ReBoot. However, often traditional animation and 3D computer animation
will be used together, as in Don Bluth's Titan A.E. and Disney's Tarzan and Treasure
Planet. Most anime still use traditional animation today. DreamWorks executive Jeffrey
Katzenberg coined the term "tradigital animation" to describe films produced by his studio
which incorporated elements of traditional and computer animation equally, such as Spirit:
Stallion of the Cimarron and Sinbad: Legend of the Seven Seas.

1.1.2 Computer Animated Film Market

The rapid advancement of technology has made computer animation available to the
masses and the animation industry is one of the fastest growing industries. The demand for
animated entertainment has expanded with the increase in broadcasting hours by cable and
satellite TV along with the growing popularity of the Internet. In the past, animation series
were aimed at children aged nine and below. In recent years however, TV stations have
been producing animation series for teenagers, adults and the whole family. Animation
series like The Simpsons and King of the Hill have been successfully aired on primetime
TV. The major markets include the United States, Canada, Japan, France, Britain and
Germany. Licensing operations for T-shirts, caps and other items have also been a major
source of revenue for animation companies. In Japan, several successful computer games
have crossed over and have become animated series like Pokemon, Monster Farm, Power
Stone and Detective Conan. More broadly speaking, animation is increasingly used in


video games, and movies are also increasingly reliant on animation and computer graphic
special effects.

Another key trend we are witnessing is the outsourcing of animation content to Asia. This
market is increasingly being tapped by North American film and television program
producers. The major factor behind this shift of computer animation production to the
Asia/Pacific region continues to be the availability of low cost, powerful computer
animation platforms and much lower labour rates in the Asian and Pacific Rim countries
compared to North America and Europe. The bulk of the outsourcing happens for 2D
animation content with some amount of 3D content. The key factors of the computer
animated film market mentioned below:

Key Facts

● The rapid advancement of computer technology has made computer animation available to
the masses.

● The major animaƟon markets include the United States, Canada, Japan, France, Britain, Korea
and Germany.

● The emerging animaƟon countries are China and India due to low labour rates animation
content ıs outsourced here.

● The outsourced computer animaƟon producƟon market is increasingly being tapped by North
American film and television program producers.

● The major factors behind outsourcing of animaƟon content to the Asia/Pacific region are the
availability lower labor rates.
● The bulk of the outsourcing happens for 2D animaƟon content with some amount of 3D
content.


1.2 Companies Analysis

1.2.1 Disney vs. Pixar

Since the release of Snow White and the Seven Dwarfs by Disney in 1937, animated films
have become one of the most universally enjoyed forms of entertainment. Disney has a
long history of developing, producing, and distributing films such as Beauty and the Beast,
Aladdin and The Lion King. The stories and characters of these popular animated feature
films have become part of our modern mythology, enjoyed generation after generation.
Traditionally, these popular animated feature films have been created using the time-
consuming and labor-intensive process of two-dimensional, hand-drawn cel animation.
The Walt Disney Company, together with its subsidiaries, is a diversified worldwide
entertainment company with operations in five business segments: Media Networks, Parks
and Resorts, Studio Entertainment, Consumer Products and Interactive Media. For
convenience, the terms the company is used to refer collectively to the parent company and
the subsidiaries through which our various businesses are actually conducted. The
company completed an acquisition of Pixar Animation Studios (2006). The Walt Disney
Company distributes produced and acquired films (including its film and television library)
in the theatrical, home entertainment and television markets. The primary banners for its
films are Walt Disney Pictures, Touchstone Pictures, Pixar, Miramax and Dimension. The
company’s primary focus is Disney-branded films under the Walt Disney Pictures and
Pixar banners.

Pixar Animation Studios started with John Lasseter and George Lucas. Pixar was initially
a computer graphics division which was of film maker George Lucas as Lucas film limited
and whose core product was the Pixar Image Computer. In 1986, Steve Jobs purchased the
computer graphics division of Lucas Film Ltd. For $10 million and established it as an
independent company named Pixar co-founded with Dr. Edvin E. Catmull. Nowadays
Pixar is an Academy Award ®-winning computer animation studio with the technical,
creative and production capabilities to create a new generation of animated feature films,
merchandise and other related products. Pixar's objective is to combine proprietary
technology and world-class creative talent to develop computer-animated feature films
with memorable characters and heartwarming stories that appeal to audiences of all ages.

1.2.2 Disney-Pixar Partnership Evolution

In May 1991, Pixar entered into an agreement with Walt Disney Pictures for the
development and production of up to three computer animated feature films to be marketed
and distributed by Disney. It was pursuant to this agreement that Toy Story was developed,
produced, and distributed. Also Disney was receiving distribution fees and %87 of the
distribution proceeds.

In February 1997, Pixar entered into a new Co-Production Agreement with Disney
pursuant to which Pixar, on an exclusive basis, agreed to produce five original computer-


animated feature-length theatrical motion pictures for distribution by Disney. According to
this agreement production costs were co-financed by Pixar and let Disney ownership of
%50, distribution rights, co-branding, profit sharing for picture merchandise and ancillary
products. The five original Pictures under the Co-Production Agreement were A Bug's
Life, Monsters, Inc., Finding Nemo, The Incredibles, and Cars. Toy Story 2, the theatrical
sequel to Toy Story, was released in November 1999, and is also included in the Co-
Production Agreement. Ratatouille was subsequently added to the terms of the Co-
Production Agreement in January 2006.

On January 24, 2006, Pixar entered into an agreement with The Walt Disney Company to
merge the two companies. The deal was approved by shareholders of both companies and
the merger became effective on May 5, 2006. The Walt Disney Company purchased Pixar
through an all-stock transaction worth US $7.4 billion. Pixar is now a wholly-owned
subsidiary of The Walt Disney Company.

1.2.3 Marvel Entertainment

Marvel Comics began life as "Timely Publications" in 1939, with comic books
featuring Captain America, Namor the Sub-Mariner and an early version of the Human
Torch. Legendary comics writer Stan Lee was hired as an office assistant in 1939. Within
two years, the 19-year-old Lee was promoted to editor of the Marvel Comics line, a post
that he would keep until 1972.

Everything changed in 1961, when Lee and artist Jack Kirby created The Fantastic Four --
a new style of superhero comic that focused on the characters' internal drama as well as
their heroic adventures. The style was a huge success, and the Lee/Kirby team went on to
create the Incredible Hulk, Iron Man, the Mighty Thor and the X-Men. The prolific Lee
worked with artist Steve Ditkoto create Marvel's greatest success story, Spider-Man. Stan
Lee's Marvel revolution extended beyond the characters and storylines to the way in which
comic books engaged the readership and built a sense of community between fans and
creators.

Nowadays, Marvel's heroes are blockbuster stars on the silver screen, with Spider-Man,
Iron Man, the X-Men and the Hulk becoming regular features of the summer movie season.

Today Marvel Entertainment, a wholly-owned subsidiary of The Walt Disney Company, is
one of the world's most prominent character-based entertainment companies, built on a
proven library of over 8,000 characters featured in a variety of media over seventy
years. Marvel utilizes its character franchises in entertainment, licensing and publishing.


Case 1: Disney & Pixar
2. Pre-Acquisition
2.1 Rationale for Acquisition

2.1.1 Research & Development
During its history, Pixar has attracted some of the world's finest talent in several areas,
most technical employees held PhD’s. Pixar's technical and creative teams have
collaborated since 1986 to develop a wealth of production software used in-house to create
its movies and keep improving in CG movie making. The acquisition brings to Disney the
talented creative teams behind the popular original Pixar blockbusters, who will now be
involved in the promotion and future development of these properties, including potential
feature animation sequels. This provides to Disney the access to valuable resources and
technology such as the Pixar’s application programing interface called “Renderman”,
which provides to Pixar higher capabilities to innovate and handle the most demanding
productions. This software property of Pixar is used by more than 100 films every year.
Pixar employees are more engaged in their work than employees of the average
organization. And because they are more engaged, Pixar employees put more effort in their
work, are more trusting and more cooperative, all factors that affect productivity, quality
and innovation. Pixar continues to invest heavily in its software systems and believes that
further advancements will lead to additional productivity and quality improvements in the
making of its computer animated films.

2.1.2 Brand Reputation
Pixar’s brand is one of the most reputable in the animation industry. The company has
been awarded many times during the last years. Pixar Animation Studios and its employees
have received more than 100 awards and nominations for animated films, commercials and
technical contributions. This reputation will enhance and reinforce even more Disney’s
reputation, which has been decreased during the last years due to its over-diversification
and expensive investments generating a low turnover during the 2000’s.

2.1.3 Pixar’s Partners
The company has known how to develop and manage strong partnerships over time built
on trust and respect of agreements. For the last 15 years, Disney and Pixar have shared one
of the most successful partnerships entertainment history. Disney first entered into a
feature film agreement with Pixar in 1991, resulting in the release of Toy Story. In 1997,
Disney extended its relationship with Pixar by entering into a co-production agreement,
under which Pixar agreed to produce on an exclusive basis five original computer-
animated feature films for distribution by Disney.


2.1.4 Pixar’s patents and licenses

This part in one of the most strengthens of this company. This intellectual property of Pixar
allows the production of animated images of a quality and richness, that are unique in the
industry, Disney will also have increased ability to fully exploit on Pixar-created characters
and franchises on high-growth digital platforms such as video games, broadband and
wireless, as well as traditional media outlets, including theme parks, consumer products
and live stage plays.

2.2 Potential risks and benefits
Assuming that there always are risks associated with large acquisitions, here we analyze
the potential risks and benefits of Disney’s acquisition,

2.2.1 Potential Benefits
For Disney, this operation will mean many value Opportunities. The potential benefits of
this acquisition are highlighted as follows.
o Consolidate 100% of profit and current and future films affecting positively Disney
feature animation.
o Maximize sequel potential in the coming years.
o Recapture distribution fees and eliminated duplicative company costs.
o Leverage Pixar's intellectual property across Disney's core businesses (e.g. theme
parks, licensing, videogame publishing, etc.) Specifically, this means integrating
Pixar's characters and creations into Disney's theme parks and merchandizing.
o Increase Disney's overall brand strength and base of powerful, high quality content
which can:
• Enhance opportunities offered by new digital distribution platforms
• Increase Disney's ability to capitalize on new consumer preferences and
emerging business models
• Improve and accelerate international growth opportunities all around the world

2.2.2 Risks

• Post-acquisition performance
During the integration process it is possible that the new entity will dissipate value instead
of creating, it is mainly due to the fact that the priority for the time being remains the
integration itself rather than regular activities. Therefore, the performance of the company
can face some slow down during this process; nevertheless it has been state before that
both companies have been operating during the last 15 years.


• Cultural incompatibilities
Perhaps, this is one of the main potential risks for Disney which is a very big company
with big bureaucracy. At present, Disney has more than 150.000 employees all over the
world. Culture in both companies are totally different, Disney is based in a hierarchical
structure with distant upper management whereas Pixar’s executives are the ones making
creative decisions. The environment in Pixar is totally different to Disney. The bonus
structure is based on collectivism, if the film succeeds everyone gets a bonus- the Pixar’s
culture has basic principles based on two concepts, Freedom to communicate with anyone
and stay always close to innovations. Despite of the fact both companies have been
working closely for the last 20 years, we can affirm that there is a huge risk of culture
shock making much more difficult the integration process. Basically, Disney’s employees
are treated like soldiers whereas in Pixar they are treated as artists.

• No synergy effects
These firms were classified as being in different two-digit SIC codes. However, our
similarity measure shows a rich array of relatedness prior to the merger as they both are in
each other’s 10 most similar firms and they also share many of the same closest 10 firms.
Thus the Disney-Pixar acquisition is consistent with Disney choosing Pixar because it is
similar enough to permit asset complementarities and new product synergies. Following
the acquisition, many Disney computer-animated movie A Bug’s Life, Cars) have been
produced using Pixar technology and distributed by the merged company. We can affirm
that this risk is unlikely to happen, Disney achieve many different synergies, specially
technological and managerial, Steve Jobs, will become a Disney board member and also its
biggest shareholder, he resulting inclusion of Steve Jobs on the Disney board may also
provide Disney with significant competitive advantages. This development, along with
Jobs now being the majority shareholder in Disney, has infused the company with one of
the most creative and visionary leaders in the media and entertainment industry to date

• Difficulties to add value
Another potential risk to consider is the fact that the performance of this acquisition will
not bring added value to the company. This risk is far-fetched to happen due to the
business model of both companies. Pixar is based on offering added value in all of its
productions.

3. Acquisition Analysis

3.1 Acquisition of Pixar
3.1.1 Financial Negotiations

As part of the agreement, Disney will issue 2.3 shares for every share of Pixar stock. The
respectful amount of 1 billion in cash that Pixar had before the acquisition was a strong
fact that Disney had to pay a premium price around 4% on Pixar share price. That would


value the deal at $59.78 a Pixar share, based on Disney's $25.99 closing price on the last
day of the week. That was a 3.8 percent premium over Pixar's closing price of $57.57. It
was noticeable that Pixar share price had surged around 11% in the year on takeover
speculation. Walt Disney has announced that it is buying Pixar, the animated studio led by
Apple head Steve Jobs, in a deal worth $7.4 billion. The acquisition of Pixar Animation
Studios by Walt Disney for $7.4 billion in a stock deal gave Pixar's chief executive, Steven
P. Jobs, a influential role as a nondependent director at Disney and he become the largest
individual shareholder of the company.

3.1.2 Integration Process

John Lasseter, the director of "Toy Story" and the central creative force at Pixar, become
chief creative officer of the two studios and the principal creative adviser at Walt Disney.
The acquisition of Pixar Animation Studios by Walt Disney for $7.4 billion in a stock deal
gave Pixar's chief executive, Steven P. Jobs, a influential role as a nondependent director at
Disney and he become the principal individual shareholder of the company.
Consequentially, the dynamic personality and an expert of consumer electronics by Steve
Jobs brought a significant knowledge to the organization. Disney's board could mean that
more innovative digital deals could be in the works.

3.2 Post Acquisition Results
3.2.1 Operational Consequence
The two companies will remain separate, with Pixar keeping its brand name and
headquarters in Emeryville, near San Francisco. Maintaining Pixar’s unique creative
character was a priority in the talks (MsnBC.Com,2006). At the time of acquisition there
were controversial expressions among Walt Disney. A statement by Barry Ritholtz, chief
investment officer with Ritholtz Capital Partners come to calm the various reactions. He
stated that "The question isn't did Disney pay too much but how expensive would it have
been for Disney if Pixar fell into someone else's hands" (CnnMoney, 2006).

3.2.2 Synergy Effects
“With the arrival of the Pixar leadership, Disney has adopted the director-driven
development and production approach that Pixar has used so successfully. What is certain
is that under Mr Iger, Disney has perfected the art of media synergy.

Moreover, Roy Disney asset that animation has always been the heart and soul of the Walt
Disney Company and it was brilliant idea to perceive Bob Iger and the firm hold that
heritage by bringing the outstanding animation talent of the Pixar team back to line. Disney
and Pixar could collaborate without the obstacles that come from two different companies
with two different sets of shareholders. After the acquisition both companies could focus
on what is most important, which was to create innovative stores, characters and films that
pleasure millions of people globally. In addition, Pixar significantly enhanced Disney
animation, which was a critical creative engine for driving growth across its various
strategic business units. Pixar had six animated movies under production. They have
grossed more than $3.2 billion worldwide


Michael Cuggino said ‘It's what Disney has known for but the movies they did in-house did
not do as well as the ones they did with Pixar’

3.3 Actual Performance
3.3.1 Pixar’s releases (Since Acquisition)
3.3.2 Disney’s Position in the Computer Animated Film Market

Nowadays, Disney is enjoying a remarkable and profitable run of hit TV programmers and
films. Economist, 2008 point out that Disney's creative momentum is so strong now that
there is no comparison between it and other big media companies (Economist.com, 2008)
Disney's creative momentum is so strong now that there's no comparison between it and
other big media companies. Disney's broadcast-TV network, ABC, is benefiting from a
number of hits, such as “Desperate Housewives”, “Lost” and “Ugly Betty”
(Economist.com, 2008). Disney has also improved the fortunes of its film business, which
earned $1.2 billion in operating profit last year, up from $200m in 2005. Some of the
increase came from the firm's acquisition of Pixar. After the acquisition, Disney laid out
ambitious plans for ten new animated films in the next four years. In addition, the
acquisition of Pixar studio has sent a signal to people inside and outside Disney that
Disney will be in the growing market of animated movies.

3.3.3 Future Expectations

In 2009, The Walt Disney Studios announced to debut the Disney Digital versions of
DisneyPixar’s animated facial appearance, Toy Story and Toy Story 2. The company
released the animated movie Toy Story 3 in June 2010. In June 2011 Cars 2 was
released by Walt Disney. The Bear And The Bow will be released in December 2011
(Film Shaft, 2009). It is based on a fairy tale about a princess who wants to be an
archer. An impressive cast includes Reese Witherspoon and Emma Thompson.
‘Newt’ will be released in June 2012 and is hugely anticipated.

Another great animated movie that created after the acquisition of Pixar is ‘Up’. ‘Up’
released on October 9th of 2010 it truly is a little masterpiece that had a high
profitability on Disney box offices.

Case 2: Disney & Marvel
4. Pre-Acquisition
4.1 Acquisition´s rationale

Marvel’s publishing business is strong. The company has managed to exploit its most
popular characters through motion pictures, video games and consumer products.
The enterprise was the top comics editor in 2008, edging out its closest rival, DC Comics,
in both unit market share (46 percent to 32 percent) and retail dollar share (41 percent to 30
percent). According to Griepp, founder of ICv2, the comic book industry had about $715


million in sales last year. Therefore, Disney sees an opportunity to plug Marvel into its
vaunted global marketing and distribution system.

With the acquisition of Marvel, Disney was aware of its vast possibilities regarding its
further international expansion and penetration of its different businesses. The following
excerpts depict the rationale for the conducted acquisition.

4.1.1 Leveraging global marketing and distribution system
4.1.1.1 Integration of Marvel characters into Disney´s theme parks
One, of Disney´s most important businesses its theme parks. Families entering this
fantastic adventure consisting of entertainment, fun, restaurants, hotels and other key
related elements, are always happy to enjoy Disney´s main characters as the famous
Mickey Mouse for instance. With the acquisition of Marvel Entertainment, it is very
probable to see Marvel characters such as Spider Man, the incredible. Romascreen (2010)
quotes Disney´s CEO:

“We’re just now considering all of our different options, so it would be
premature to say when or where in the parks you would see Marvel
characters — but I think it’s safe to say that you’re going to see some of those
great Marvel characters walking around in the future.”

This definitely will raise the attractiveness of the theme parks across the world like the
ones in California, Paris and Hong-Kong. Guests will be entertained with a wider character
repertoire. Hence, it is justified to assume, that customer´s overall satisfaction will increase
and strengthen the commitment, which in the end will lead to an increase in turnover.

4.1.1.2 Consumer Products/ Merchandise Licensing
Disney´s worldwide merchandise licensing operations include a diverse range of product
categories, the most significant of which are: toys, apparel, home décor and furnishings,
stationery, accessories, health and beauty, food, footwear, and consumer electronics. The
Company licenses characters from its film, television and other properties and earns
royalties, which are usually based on a fixed percentage of the wholesale or retail-selling
price of the products. Some of Disney´s major properties, which were licensed by the
enterprise include Mickey Mouse, Disney Princess, Toy Story, Winnie the Pooh, Cars,
Disney Fairies and Hannah Montana. Since the acquisition of Marvel Entertainment,
Marvel properties including Spider-Man and Iron Man display a further important source
of income. Starting with toys, apparel and other items based on last summer’s hit Iron Man
2, Disney also released Marvel epic, Thor which soon will be followed by the notorious
Captain America: The First Avenger.
Additionally, Marvel's broad library of characters has been integrated into a wide-ranging
global publishing program, which will feature books in an extensive collection of formats.


4.1.1.3 Studio Entertainment
The acquisition of Marvel, makes Disney a partner with Paramount Pictures, Sony Pictures
Entertainment and 20th Century Fox, all of which have long-term deals to make or
distribute movies based on superhero characters. Sony holds the film rights to Spider-Man,
while Fox has the X-Men and Fantastic Four in perpetuity (nytimes, 2010).

Paramount, a unit of Viacom, has an agreement to distribute five Marvel films, including
two “Iron Man” sequels, over the next few years. Disney said it would honor the contract,
but the goal is clearly to bring Marvel’s movies in-house.

According to Disney´s annual report (2010), the Company has an agreement with a third-
party studio to distribute the Marvel films Iron Man and Iron Man 2, Thor and Captain
America, which were released already except Captain America. Furthermore they have a
separate agreement with another third-party studio to distribute the Marvel film The
Incredible Hulk, which has also been released. Under these arrangements, the Company
incurs the cost to produce the films and pays a fee to the third party studio to distribute the
film. The firm recently purchased the distribution rights for The Avengers and Iron Man 3
from a third party studio and will pay certain fees to that studio associated with the
performance of those films, subject to a minimum guarantee.

4.2 Potential Benefits / Risks
This part deals with the potential benefits and risks arising through the acquisition of
MARVEL Entertainment. First, potential benefits are displayed. Subsequently potential
risks are presented in order to provide the reader with an overall idea about the potential
effects caused by Disney´s internationalization process.

With the acquisition of Marvel Entertainment, Disney strengthened its creative and brand.
Marvel has world-class artists, a fantastic stable of well-known characters like Iron Man,
the Hulk, Thor and Captain America, and loyal fans who express their passion every day in
much the same way fans of Disney do. With the beginning of 2011, Marvel epics, Thor
and Captain America: The First Avenger, coming to theaters in 3D this summer and
Marvel TV shows, games, comics and merchandise now flowing through Disney´s global
marketing and distribution network (Disney annual report 2010).

According to Disney´s expectations stated in its annual report 2010, the acquisition will
initially result in lower earnings per share than they would have earned in the absence of
the merger. The enterprise furthermore expects that over time the merger will yield
benefits to the combined company such that the merger will ultimately be accretive to
earnings per share. However, there can be no guarantee that the increase in earnings per
share expected in the long term will be achieved. In order to reach increases in earnings per
share as a result of the merger, the combined company will, among other things, need to
effectively continue the successful operations of Marvel after the merger, develop
successful new content (including future feature films and television series or sequels to


Marvel productions) based on Marvel characters and successfully integrate Marvel
products into the combined company’s various distribution channels.

As Disney’s film division becomes suddenly crowded, justified by the acquisition, the
company may find its new partnerships bumping into one another. The nytimes states, that
a few months ago, Disney’s new DreamWorks partners found themselves assuring
executives that they would avoid any conflict with the “Pirates of the Caribbean” franchise
as they sought to develop a film based on Michael Crichton´s novel “Pirate Latitudes.”

However, according to Disney´s annual report 2010, the company acquisition shows
already the its first repercussions. Disney´s managed to increase in selling, general,
administrative and other driven by the acquisitions of Marvel. Segment operating income
increased 11%, or $68 million, to $677 million due to improved results at our retail
business and an increase in our publishing business driven by Marvel titles. Furthermore,
Disney states that the increase in television distribution and other revenue was primarily
due to the inclusion of Marvel.

5.1 Acquisition of MARVEL

5.1.1 Financial Negotiations

In recent years, Disney put lots of strengths in its acquisition actions. Due to the firm´s
successful actions and good business operation, Disney experienced an astonishing
increase in its financial income. Therefore Disney was able to offer an additional financial
support for its businesses, which boosted the scale even more.

August of 2009, Disney announced to acquire Marvel Entertainment based on the
following data:

• According to the agreement and Disney’s stock closing price, Marvel
Entertainment’s shareholders would obtain 30 USD in cash for each share.
• Total price of this acquisition would come to 4.24 billion USD based on Marvel’s
stock price, per share 54.03 USD.
• Marvel’s share holders would receive Disney’s share of 0.7452

On December 31, 2009, the Company completed a cash and stock acquisition for the
outstanding capital stock of Marvel Entertainment, Inc. (Marvel), a character-based
entertainment company. This acquisition is consistent with the Company’s strategic value
creation through utilization of intellectual properties across Disney’s multiple platforms
and territories.

The acquisition purchase price totaled $4.2 billion. In accordance with the terms of the
acquisition, Marvel shareholders received $30 per share in cash and 0.7452 Disney shares
for each Marvel share they owned. In total, the Company paid $2.4 billion in cash and
distributed shares valued at $1.9 billion (approximately 59 million shares of Disney


common stock at a price of $32.25).

The Company is required to allocate the purchase price to tangible and identifiable
intangible assets acquired and liabilities assumed based on their fair values. The excess of
the purchase price over those fair values is recorded as goodwill.

Figure 1: Marvel acquisition figures

Source: Walt Disney Annual Report 2010

Intangible assets primarily consist of character-based intellectual property with an
estimated useful life of approximately 40 years.

The goodwill reflects the value to Disney from leveraging Marvel intellectual property
across our distribution channels, taking advantage of Disney’s established global reach.
The goodwill recorded as part of this acquisition is not amortizable for tax purposes.


5.1.2 Integration Process

"Disney is the perfect home for Marvel's fantastic library of characters given its proven
ability to expand content creation and licensing businesses," said Ike Perlmutter, Marvel's
Chief Executive Officer. Based of the decision to acquire Marvel, further benefits would
be gained by leveraging the characters of the famous Iron Man, Spider-Man, Xmen,
Captain America, Fantastic Four, Thor and more than 5,000 other Marvel Characters.

Marvel’s former CEO Ike Perlmutter will continue to be in charge of Marvel’s business
and directly report to Disney’s CEO Robert Iger.

All members of Boards between Disney and Marvel Entertainment approved and agreed on
this acquisition, which is followed and based on clearance under the Hart-Scott-Rodino
Antitrust Improvements Act. This acquisition is subjected to United States Merger Control
Regulations.

5.2 Post Acquisition Results

5.2.1 Operational Consequences

Disney will file a Registration Statement on Form S-4 that includes a proxy statement of
Marvel and which also constitutes a prospectus of Disney. Marvel will mail the proxy
statement/prospectus to its stockholders. "Ike Perlmutter and his team have done an
impressive job of nurturing these properties and have created significant value. We are
pleased to bring this talent and these great assets to Disney. We believe that adding
Marvel to Disney’s portfolio of brands provides significant opportunities for long-term
growth and value creation.” said Disney’s CEO.

Marvel´s CEO Perlmutter furthermore stated, that Disney is the perfect home for Marvel’s
fantastic library of characters given its proven ability to expand content creation and
licensing businesses. Additionally, he stated that the acquisition is an unparalleled
opportunity for Marvel to build upon its vibrant brand and character properties by
accessing Disney’s tremendous global organization and infrastructure around the world.

Disney says that Marvel’s current deals will stay in place. But movies based on other
characters can be put into the pipeline, and Disney’s global reach in film distribution will
then be used to handle those releases in-house. Disney owns 229 stores in USA and 105
stores in Europe. Marvel’s products will begin to show up in Disney’s stores.

Another important factor is Marvel has many licensing partners in the market, before this
acquisition, Marvel’s partners were Disney’s direct and indirect competitors. After wholly
acquired Marvel, Disney’s competitors became its partners.

5.2.2 Synergy Effects

Disney Enterprise is a Multinational Diversified Entertainment and Media Enterprise. It
possesses 5 main business sections: Theme Parks, Studio Entertainment, Interactive Media,
Media Networks and Consumer Products. With its continuous development, Disney


expanded fast and at present it owns PIXAR Animation Studio, Touchstone Pictures,
Miramax, Buena Vista Home Entertainment, Hollywood Pictures, ESPN, ABC and other
highly influencing entertainment firms.

Marvel Entertainment, Inc. is one of the world's most prominent character-based
entertainment companies, built on a library of over 5,000 characters featured in a variety of
media over seventy years. Marvel utilizes its character franchises in licensing,
entertainment (via Marvel Studios and Marvel Animation) and publishing (via Marvel
Comics).

From the above mentioned companies business scales, Disney and Marvel will benefit
from synergies. Hence, the businesses will experience a mutual share of benefits and high
potential increased abilities.

From a Market point of view, Disney has a set of mature marketing operating system and
more marketing running experience, especially in the international market. Disney and
Marvel, both companies have similar target markets and market compatibility. Disney
would offer more marketing experience, and both would share the market resources
mutually.

From Financial point of view, thanks to Disney’s better profitability structure, Disney
could offer more financial funds to support Marvel’s development after the acquisition.
Through this acquisition, Marvel’s shareholders would receive a big amount of cash in
return. This was in accordance with Marvel’s shareholder’s benefits. For Disney, Marvel’s
business structure has an enormous potential to improve in the future even more.

From Inner Management point of view, Disney is a company marked having years of
experience in entertainment and management. Due to Disney´s experience and profound
knowledge of the markets and complex functioning of the different diversified businesses,
the company would be more able to run Marvel’s business and guide it towards a
profitable company through inner integration.

5.3 Actual Performance

5.3.1 Marvel’s Current Situation

Marvel is subsidiary wholly owned by Disney now. After the acquisition, Marvel launched
out TV division, Marvel Television, appointed Heroes and Smallville to run it. September
2010, Smith Tinker the seattle based connected game company has entered in a licensing
agreement with Marvel Entertainment and will draw upon their vast universe of super
Heros including Iron Man, Spider-man, Hulk, X-men, Wolverine , Thor and Captain
America. According to Marvel’s strategic plan, in this year Marvel will launch out Thor
(Completed), to attract audience’s eyes. Marvel has done an amazing job connecting
generation of fans to an enormous universe of characters through comic movies, television
and merchandise.


5.3.3 Future Expectations

Because of successfully conducted acquisition, combined with its excellent operations,
Disney was able to earn 8% distribution fee on Iron Man. Another important expected
income of 115 million USD will derive from two movies. The first part will be generated
for the release of Avengers. This movie will probable be released on May 4th, 2012. The
second movie, namely Iron Man III, will be released on May 3th, 2013. If those movies
perform stronger than currently expected, Paramount will generate more than 115 million
USD. Both the companies will have more parts of businesses to be integrated in the near
future. Surely, Disney will dedicate more power and investments to promote Marvel´s
success.


6. Conclusions

The analysis of Disney’s acquisition of Pixar and Marvel demonstrates a strong and unique
corporate strategy turned to the reinforcement and the development of Disney’s
Entertainment Empire.

The company that is dealing with an entire portfolio of strong entertainment entities, which
are targeting different markets and customer profiles. The diversity of the offer assures the
firm’s position within the global entertainment industry and and its development over the
years to come.

Disney’s acquisition of Marvel and Pixar are quite similar in a way that there are both
responding to market demand and trends, two elements that Disney has been failing taking
into consideration into its latest creations. Pixar is reflecting the new technological
computer animated films, which tends to replace the old-fashioned animated work art and
Marvel is the symbolism of timeless super heroes. Both of these companies’ resources
were critical to Disney in order to access to their technologies and brand portfolio,
although the company was mainly investing on the long run trying desperately to
reintroduce talent and creativity within the company.

Indeed, the production of films and famous characters are at the core of their business
strategy, this creativity is not only a matter of maintaining the brand reputation, it is
primarily about generating profit off these production and promoting them through their
entire divisions (stores, themes parks, TVs, merchandising, resorts etc…). With Marvel
and Pixar, Disney is making a strategic move collecting at the same time some precious
“cash cow productions” but at the same time it is investing heavily on technologies and
R&D for further films.

Nevertheless, the integration of these companies have been limited considering that there
are both operating apart from Disney’s original structure conserving therefore, a certain
independence in its internal management and creative orientations. These limits are part of
a strategic choice for Disney, which is organised as a multi-divisional structure although
this type of organisation is largely reducing the synergies effects that could be achieved
under a regular restructuration and it certainly does not motivate the cohesion around a
unique corporate culture as Disney was in the past, known for.

To conclude, it is doubtless that these two acquisitions are part of a natural development of
the company and are perfectly coherent with the actual strategic objectives of Disney,
although it seems that the company is more dedicated to the management of its division
portfolio than the actual performances and synergies that could be achieved among them.
The continuous fragmentation of the company is playing against itself, unable to create or
innovate as it used to, it is now constrained to absorb in order to grow.


Bibliography and references

o Pla, J. and León, F. (2004). Dirección de Empresas Internacionales. Madrid: Pearson
– Prentice Hall.Businessweek
o Exploring corporate Strategy. Johnson. G and Scholes. K.m Thomson, 6th edition
o Grant. R.M (2005) “Contemporary strategy analysis”. Blackwell Publishing
o Economist.com, 2008) Magic restored [Online] Available at:
http://www.economist.com/node/11058438 [Accessed on 17th of June 2011]
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17th of June 2011]
o The New York Times (2006) Disney Agrees to Acquire Pixar in a $7.4 Billion Deal
[Online] Available at:
http://www.nytimes.com/2006/01/25/business/25disney.html?_r=1&oref=slogin
[Accessed on 17th of June 2011]
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http://www.pixar.com/companyinfo/about_us/overview.htm [Accessed on 17th of
June 2011]

o Film Shaft (2009) The Future's Bright, The Future's PIXAR! [Online] Available at :
http://www.filmshaft.com/the-futures-bright-the-futures-pixar/ [Accessed on 17th of
June 2011]

o Pixar (2011) Available at: http://www.pixar.com/companyinfo/about_us/overview.htm
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o CNN Money (2006) Disney Buys Pixar [Online] Available at:
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[Accessed on 17th of June 2011 http://www.digital-
vector.com/GlobalAnimationIndustry.html

o Disney (2010) “Annual report 2010” Available at:
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June 2011]

o Pixar (2011) “About the company” Available at:
http://www.pixar.com/companyinfo/about_us/overview.htm [Accessed on 17th of
June 2011]


o Author not known (2010), online available: http://www.ramascreen.com/marvel-
characters-are-coming-to-disney-theme-parks-in-the-future; [Accessed on 17th of June
2011]

o Cieply Michael (2009), available online:
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15th of June 2011]

o NBD Disney acquire Marvel, available online:
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15th of June 2011]
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http://news.mtime.com/2009/09/01/1414881.html

o Disney To Acquire Marvel Entertainment August 31, 2009 [on line].
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