1. Caitlin Payne
From “Memo Advising Entertainment Merger”
Written November 2013
Background:
CEO of the Walt Disney Company, Robert Iger, announced on January 24, 2006
that a $7.4 billion deal was reached with Pixar Studios to acquire the company into
Disney’s Studio Entertainment division (The Walt Disney Company, 2006). The
companies have been working closely together for several years, with Disney responsible
for distribution of Pixar films but the decision will result in a permanent and complete
combination of the creative and business aspects of each company.
Alternatives:
1) The Department of Justice can allow the acquisition.
2) The Department of Justice can deny the acquisition.
3) The Department of Justice can allow the acquisition with the condition that
Pixar maintains an independent facility and management structure.
Allow:
Even though Disney is a huge company with many interests, it is not the largest
media entertainment conglomerate. Time Warner is the largest and News Corporation
and Viacom are both nearly comparable to Disney’s size and Blue Sky Studio, Sony
(Columbia Pictures), Seagram (Universal Films Studio), and Dreamworks make up a
substantial contribution of market share. Of the top four companies, Disney has the
lowest annual growth rate of only 2.2 percent compared to Time Warner’s 32.1 percent,

2. News Corp’s 19.7 percent, and Viacom’s 9.9 percent growth rates (Szewczyk). Pixar is a
small company in comparison, only producing six films in its existence.
Disney and Pixar already have a standing co-production agreement where Pixar
develops and directs films but Disney distributes, advertises, and co produces. The
arrangement gives 50 percent ownership all productions to both Pixar and Disney so a
full acquisition would do little to disturb the current industry balance (Gadkari, 2013).
Because of its dependency on Disney for advertising and distribution, Pixar has never
developed its own means of distribution and instead put its resources toward creative
technology. The lack of post-production structure means that without at least partial
Disney ownership, Pixar will need to partner with one of the top companies if it is to
survive. Disney is already well established in animated entertainment and the addition of
Pixar adds only a small additional capacity for production (Gadkari, 2013). While Pixar
is dependent on Disney for distribution, Disney also needs Pixar as the company attempts
to pull itself out of a long run of unsuccessful movies. Dreamworks, Universal, and Blue
Sky Studios have been producing popular, high grossing films with new technology that
Disney can not currently match. Pixar provides the creative and innovative aspects of the
business that Disney needs to refresh its image and become relevant and competitive
again (La Monica, 2006).
Deny:
While it might not be the largest entertainment company, Disney is one of the
main players, especially in animation. Dreamworks and Blue Sky Studios are both well
established and consistently put out blockbusters and Disney’s acquisition of Pixar will
likely pose little threat to their popularity, it may provide Disney with enough power to

3. keep Time Warner or Viacom out of the animation sector, making entry difficult because
they lack the creative personnel necessary to compete with Disney’s marketing and
reputation in conjunction with Pixar’s innovation and novelty (Shah, 2009).
There is also concern over whether Disney’s strong emphasis on profit
maximization will stifle the imaginations or risk taking of Pixar creators or spark tensions
between the proposed new mixture of executives. Such tensions could make the
acquisition less successful by reducing the value of Pixar while not enhancing Disney’s
quality, in which case the outcome of the merger would be less than the two separate
parts. Internal tensions could result in inefficiencies in production, lowering public utility
from the newly merged entities (ICMR, 2013).
Allow Conditionally:
The acquisition of Pixar by Disney would allow Disney to reassert itself as viable
competition to the current industry leaders Blue Sky Studios, Universal Studios, and
Dreamworks but only if there is some reassurance that the acquisition will not result in a
loss of quality for consumers. Adding the condition that Pixar maintains its independent
facility and management structure should help to ensure that the innovative spirit of Pixar
is not dampened by the more conservative, business minded Disney Company, resulting
in a synergy that increases efficiency and quality for the consumer (La Monica, 2006).
Recommendation:
I recommend that the Department of Justice allows the acquisition of Pixar by
Disney. Both companies gain from the current partnership and a full acquisition should
magnify the benefits that consumers receive. Consumers will have a better quality movie
experience while facing few negative consequences.

4. Pixar does not have the structure to adequately distribute and advertise their films
independently and rely on bigger firms for crucial support; Disney can provide these
services at a lower cost due to their economies of scale and large networks. If Disney was
not providing support, Pixar would need to find another big company to fill the role.
Disney is a better option than other big companies because Disney already has a foothold
in animation that will not be dramatically impacted by the acquisition, but will instead
stabilize a floundering competitor against industry leaders such as Dreamworks. This
provides for the smallest change in market share because Disney will be gaining only the
second half of a company they already works with in a sector they are already a player in.
If a non-animation oriented company, like Time Warner, got control of Pixar, it would
gain an entire new company and would spread its horizontal reach and dominating size
into a new sector and crowd the small fringe out.
This acquisition would benefit consumers as well as the companies. Consumers
will be able to watch and experience Pixar innovation through efficient Disney
distribution as well as in person at the Disney theme parks. The consumer incurs few
negative consequences because there are several large firms that compete with each other
and the acquisition of Pixar by Disney will only strengthen the competition by reasserting
Disney as a key player, keeping costs the same while expanding and increasing quality.
There is the risk that the acquisition will result in inefficiencies or a dampening of
creativity which would mean a loss for consumers but the success of the current
agreement and cooperation between Pixar and Disney suggests that a full merger would
accentuate the synergy between the firms and result in a net gain for consumers and the
industry.