Last Updated 06 Jul 2020

Pixar Case Study

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1. Increased use of Technology: There was a move from the Hand Drawing Animation to the Computer Generated Animation. This not only helped to reduce the costs to the various companies, but also helped in creating 3D effects which gave the viewers a more life like experience while watching the animation movies. With Pixar introducing the RenderMan, Marionette and RingMaster softwares, the animation industry was revolutionalized. In fact, the last 44 of the 47 movies which had won the Oscars for visual effects had used the RenderMan software.

1. Movie Economics: Although the success of the movies were measured through their box office collections, the actual financial success came through the other sources of revenue. Such sources included home video sales, pay per view, video-on-demand on the cable channels and merchandise sales including toys, apparel, books etc. Infact by 2005, the largest of the revenue source of the movies was not the box office collection but home video. Since the character related had long trails, revenue for a hit animated movie would come in over many years.

Companies also started also focusing bringing out sequels as they were another important source of revenues. Infact, the sequels of Toy Story, Shrek and Ice Age generated between 30% and 90% more box office revenue than the originals. Successful sequels would also extended the life of the original movie, particularly for animated features that appealed to successive generations of young children.

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1. Extent of Competition: A lot of other film studios such as Fox, Sony, LucasFilm, DreamWorks, MGM Universal and Paramount entered the fray for producing movies targeting the family segment. Since the animated movies generated highest returns of all genres, the barriers to entry decreased as access to technology grew. Additionally, a handful of fledgling animation studios profliferated in California’s Bay Area. Also, the distribution fee for the movies fell drastically, with DreamWorks paying just 8% distribution fee to Paramount. In fact, the companies had an increased bargaining with their distributors.

Q2. Based on the relevant information in case, quantify in USD, the potential benefits and likely disadvantages of the acquisition. Also analyse the risk in the acquisition. Answer: The potential benefits of the acquistion are: 1. One of the major benefits of Disney’s acquistion of Pixar is that animation was integral to Disney’s corporate strategy because characters from the animated films drove retail in its theme parks and consumer product divisions. And Pixar’s track record for producing smash hits was unmatched. Infact Merrill Lynch termed the acqusition as a near strategic fit. If Disney does purchase Pixar, it would have to pay an enterprise value fee between $6.5 Billion and $7.4 Billion, given that Pixar’s market capitalization is $5.9 Billion. Also based on the discounted cash flow valuation method, the expected cash flow would grow at 5-6% in perpetuity from 2006-2015.

1. By acquiring Pixar, not only would Disney get one of the best animation studios in the world, it would also help it reduce it’c cost as they would not have to pay various fees to Pixar . Also, the average collection of Pixar movies was $537.8 million compared to the $270.7 million earned by the Disney movies. Hence, Disney could easily increase the average box office collections of its movies by acquiring Pixar.

1. Not only with respect to the finances, but with respect to the human resource that Pixar would bring along, would Disney be interested in acquiring Pixar. Infact some industry observers stated that the move would transform Disney into the studio of the 1930s – a “boutque” that was “unencmbered by a large bureaucratic apparatus.” Bringing both Jobs and Lasseter into Disney’s fold would be like bringing back Walt himself.

The potential disadvantages and risks associated with the acquisition were : 1. Many analysts believed that the aquisition would be too expensive for Disney. The projected P/E ratio for Pixar was 46. Its nearest rival, DreamWorks P/E was in the 30s range. If Disney went ahead with the acquisition, it would be nonsensical because it would be heavily dilutive with Disney trading a P/E of 17. Additionally, if the creative talent at Pixar walked out, Disney would have bought the most expensive computer ever sold.

1. Deutsche Bank speculated that Disney could make 65 sequels to the Pixar hits for the proposed $6.5 Billion purchase price of Pixar. 1. The biggest risk of them all is the difference in cultureof both the organizations. Pixar operated on 3 basic principles. First was that everyone had the freedom to communicate with anyone. Second, everyone was made to feel safe to offer ideas. And thirdly, the company vowed to stay close to innovations happening in the academic community. Also, the loyalty among the 750 employees at Pixar was very high. However, would the employees working in such a culture blend in with Disney’scorporate culture was a big question for Disney to answer.

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