This article is written by Bhumika Saishri Panigrahi, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
The Walt Disney Company was a multibillion-dollar global family entertainment and media conglomerate. Media networks, parks and resorts, studio entertainment, consumer products, and interactive media were the five business segments of the corporation. Walt Disney’s overall income in 2011 was estimated to be around $40.9 billion. In 2006 and 2007, the business made a number of key acquisitions as part of its growth strategy, including Pixar and Marvel. As part of its diversification strategy, Walt Disney bought Lucasfilm Ltd. (Lucasfilm) in 2012. George Lucas, the founder of Lucasfilm and the inventor of ‘Star Wars,’ sold his company for US4.05 billion to ‘The Walt Disney Company.’ George Lucas, who owns a 2.2 percent ownership in the company, will solely serve as a creative consultant for the upcoming films, according to the agreement. Analysts found the deal helpful due to Disney’s post-acquisition of brands like Pixar and Lucasfilm, and predicted that with its aggressive acquisition strategy, Disney will become the largest property owner in the entertainment business.
Disney’s acquisition of Lucasfilm, the production company behind “Star Wars,” is proving to be one of the best business decisions ever made. The $4.05 billion cash-and-stock purchase was announced on Oct. 30, 2012, and it signalled the beginning of a new era in the Star Wars franchise. In just a few years, Disney would recoup its investment and more. According to comScore, the four Star Wars feature films Disney has produced have generated more than $4.8 billion at the box office.
Rationale behind the acquisition
The goal was to acquire the Intellectual property and the special effects technology of Lucasfilms. The Star Wars series, in particular, fits nicely inside the Disney intellectual property portfolio, and the strategic and financial consequences of this acquisition are intriguing. The analysts had spent a significant amount of time assessing this transaction and have come to the conclusion that they are uniquely positioned to maximise the value of Lucasfilm’s IP in a way that can generate significant value for the shareholders beyond the purchase price.
The company has drawn value from Lucasfilm’s intellectual property in a variety of ways. George Lucas and his team have turned Star Wars into one of the most popular and long-lasting family entertainment franchises in history, as well as one of the most popular licenced character goods brands in the United States and around the world.
After a meeting between George Lucas and then-Disney CEO Bob Iger during the launch of the Star Tours – The Adventures Continue attraction in May 2011, discussions about the prospect of The Walt Disney Company establishing a distribution contract with Lucasfilm formally began in May 2011. Lucas informed Iger that he was considering retiring and that he intended to sell both the firm and the Star Wars franchise. Disney announced a deal to buy Lucasfilm for $4.05 billion on October 30, 2012, with half of the money paid in cash and the other half in Disney stock. Lucasfilm had previously worked with Disney’s Walt Disney Imagineering division to construct Star Wars and Indiana Jones-themed theme parks for various Walt Disney Parks and Resorts throughout the world.
Kathleen Kennedy, Lucasfilm’s co-chairman, was named president, reporting to Walt Disney Studios Chairman Alan Horn. She also works as the Star Wars brand manager, collaborating with Disney’s various lines of business to grow, integrate, and optimise the value of this global franchise. Kennedy is a producer on the upcoming Star Wars feature films, with George Lucas working as a creative consultant at first.
Disney bought the operating businesses of Star Wars, Indiana Jones, and Lucasfilm in live-action film production, consumer items, video games, animation, visual effects, and audio post-production as part of the agreement. Disney also bought Lucasfilm’s entertainment technology portfolio. Employees of Lucasfilm were supposed to stay in their existing places. In the fiscal year 2014, Disney will begin selling Star Wars merchandise. Certain products will be co-branded with the Disney name beginning with Star Wars Rebels.
The Disney-Lucasfilm merger was approved by the Federal Trade Commission on December 4, 2012, allowing the acquisition to be completed without having to deal with antitrust issues. Lucasfilm Ltd. changed its name to Lucasfilm Ltd. LLC on December 18, 2012, after converting from a corporation to a limited liability company. Disney closed the transaction on December 21, 2012, and Lucasfilm became a wholly owned subsidiary of the company.
Analysis of the acquisition
The news that Disney was buying Lucasfilms shook the whole Star Wars fanbase in 2012. The revelation elicited a burst of joy from fans eagerly anticipating new Star Wars films. Disney did not disappoint, saying that development on Star Wars Episode VII will begin in 2015. The acquisition of Lucasfilms by Disney is about more than just another trilogy. Before deciding to buy Lucasfilms, Bob Iger sat down and watched all six Star Wars films again. It wasn’t as if he hadn’t noticed them before. He did it this time, though, with a notepad and a pencil in his hand. As Disney was in private negotiations with the franchisee owner, George Lucas, he needed to do some research. Iger needed to know that Lucasfilms still possessed a trove of unreleased material, such as Luke Skywalker, Padme Amidala, and Darth Vader. The Star Wars episodes were originally supposed to be nine, Iger wanted to make sure Lucas had enough intellectual property for Disney to employ. They had, it turned out.
Lucas kept a detailed record of the Star Wars universe. Lucasfilms had a large database called the Holocron, which was named after a mythical Force-powered crystal cube in the franchise. The real-world Holocro has data on 17,000 personalities from the Star Wars universe who lived on thousands of worlds over the course of 20,000 years. Disney had a hard time processing all of the information.
Iger was really pleased with the purchase. The transaction was a wonderful fit for Iger’s Disney strategy. Bob Iger’s goal is to ensure the company’s creative and competitive future in a period when consumers are spoiled for choice thanks to cable television networks and the Internet’s widespread popularity.
Disney was able to explore a popular series by acquiring Lucas Films. The average revenue from licencing for Lucasfilm is about $250 million USD. While George Lucas excelled at commoditizing beloved characters, Disney has elevated the practise to an art form. Disney has always been known for its ability to create memorable characters.
When Disney first began out with Mickey Mouse and Cinderella, Belle, and Snow White from the Grimm Fairy Tales, Iger recognised it as being in Disney’s original action plan. It now has characters like Han Solo, R2D2, C3PO, and Darth Vader to add to its already massive roster of marketable characters thanks to Lucasfilms. Disney issued 37.1 million shares and paid 2.2 billion dollars in cash as part of the merger agreement. The transaction was valued at 4.1 billion dollars based on the closing price of Disney shares on December 21, 2012, which was 50 dollars per share.
Benefits to George Lucas
George Lucas did not want LucasFilms’ top management to shift. If Disney’s acquisition of Pixar was any indicator, they did not appear to be leaning in that direction.
Disney believed that keeping those who were familiar with the franchisee was beneficial to the franchise’s growth and expansion.
Post acquisition results
Released Star Wars:
The Force Awakens in December 2015
- Over $2 billion at box office
- → highest grossing film in the entire history of Disney movies
- → 3rd highest grossing film in history (after Avatar and Titanic)
- Ripple effects
- Toys and merchandise brought in more than $700 million • Star Wars-themed land underway in Disneyland
Disney directly reduced its competitors, such as Pixar and 21st Century Fox, by acquiring them. Since the beginning of the 2000s, when the media had been through a digital revolution, Disney had been challenged by a growing number of competitors who had developed computer-aided animation technology. 21st Century Fox was one of the industry’s largest competitors in the film business. Analyzing Fox’s financial performance before the acquisition reveals that the company was not in the competitive market. To summarise,
Disney’s recent M&A transactions appear to be profitable. Furthermore, COVID-19 had mainly boosted worldwide media consumption due to isolation and social distancing conditions, which Disney+ would profit from in the next quarters. According to the most recent Q3 report, Disney’s acquisition of 21st Century Fox will continue to benefit the company, as Disney’s Direct-To-Customer segment sales grew to $4 billion, despite a decline in other areas due to COVID-19. As a result, we expect Disney’s M&A plans in the media segments to be successful in the long run.
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