This article is written by Riya Dubey, a student pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

Walt Disney is a media and entertainment company founded in 1923 by Walt Disney and Roy Disney. Pixar was found in 1986 by Steve Jobs and is the pioneer in animation. In 2006, Pixar was acquired by Walt Disney. So, here we going to discuss the reasons why the merger was the best option and what are the reasons behind the successful merger of Walt Disney and Pixar even after so many years. 

Timeline

• The relations between Disney and Pixar were built in 1991 when they signed an agreement to produce and distribute the first computer-generated animated movie together that movie was “Toy Story”.
• After the success of the movie Toy Story in 1995, Disney and Pixar in 1997 signed another contract to produce five movies together in the next ten years.

The list of movies they produced under this contract includes:

1. The Bug’s Life
2. Toy story 2
3. Monsters, Inc.
4. Finding Nemo
5. The Incredibles

• When the collaboration deal was at its end in January 2009, Disney announced that they will acquire Pixar Animation Studios for $7.4 billion.

The vertical merger between Walt Disney and Pixar

In a vertical merger, the merger takes place between two or more companies that operate for the specified finished product at different stages in the production process. This usually takes place so that there can be an increase in synergies created by the merging of companies. Vertical merging can be cost-efficient, increase profits, helps in diversification, and expands the market.

And when it comes to the merger of Walt Disney and Pixar it was a vertical merger because Pixar has specialization in animations and whereas Disney’s main focus is on creating animated movies. Both companies were in the same field and were operating at different stages of production. Their synergy has resulted in the production of smashing hits worldwide.

The merger of Disney and Pixar was made on two alliances:

1. Sales Alliance: Here both Disney and Pixar will have to works on maximizing the profits by the marketing of their product together.
2.  Investment Alliance: Here both companies have to invest in the animation pictures and both will get a share of 50% profit made from the movies.

What other alternatives were available?

Internal Development:

The following benefits were available to Disney:

• Acquiring human and technology assets;
• 3D technology; and
• Development cost and fierce competition.

Strategic Alliance:

The following benefits were available to Disney:

• Computer Animated Production System;
• Feature film related agreement; and
• Co-production agreement.

Merger & Acquisition:

The following benefits were available to Disney:

• Modernized animation department;
• Elimination of competition; and
• Access to technology as well as human capital.

Reasons for the merger

• Disney by acquiring Pixar was getting the pool of talent in both creative and technical terms. This was going to be a great asset for Disney. The combined efforts and resources of Disney-Pixar can produce more movies in a year resulting in value addition for Disney.

• Disney was not getting the response that is expected and hence acquiring Pixar could have helped Disney in content generation with the advice of experts in Disney for distribution resulting in the maximizing revenue amount for both of the domains.

• For Pixar, this deal will be beneficial in terms of gaining monetary support from Disney. 
• Getting acquired by Disney would provide Pixar a better position in the market against competitors like Lucasfilm, DreamWorks, Universal, etc. Disney was having experience in the animation industry and has assets like theme parks. And it would help Pixar to get the ratio of private equity increase. The acquisition was also helpful for Apple iTunes.

Comparison chart of Pixar and Walt Disney

	Pixar	Walt Disney
Area	Short movies, ad commercials	Animated movies
Animation technology	3D animation	2D
Software	Had 10 years of the proprietary software system. RenderMan  Marionette Ringmaster Till 2005, these were used in 100 films and out of this 47 won the Oscar.	None
Skill	It had employees have technical knowledge (PhDs).	Lack of computer graphic artist.
Assets	Computer graphic  Creativity in storytelling	Experience in the know-how of the movie industry.
Distribution channel	None	Movie TV DVD
Corporate culture	Free-spirited creativity Egalitarian collaboration	Proper management Reinforce culture
Operation cost	While creating the Toy Story there was a staff of only 110.	The larger staff of 125,000 employees and a large budget.

Negotiating powers of seller

Pixar had have been great in creating the latest technology for animating short movies and Disney was not having that technology. So, by acquiring Pixar, Disney would have got the latest technology to stand in the market. Disney and Pixar both have talented teams of scriptwriters and animators. While acquiring Pixar, Disney knew that in the US, scriptwriters are unionized and in past, they have gone to strikes and it has resulted in the loss of hundreds millions of dollars to the studios. Disney was clear that employees of Pixar cannot be taken for granted.

Negotiating powers of buyer

Both Disney and Pixar had a great place in the market. All the movies produced by Pixar then were spinners for whoever was associated with it. Disney had considerable clout in bargaining for contracts.

In this deal, Bobs knew that acquisition of Pixar can turn Disney around therefore to reduce the fear of oppression he assured that the corporate culture of Pixar will be kept untouched. We can therefore say that here Disney was having low bargaining power.

Reasons for the successful corporate marriage of Walt Disney and Pixar

Merging of corporate culture:

Certain things in the change management process have to be right for getting benefits from the merger of the corporate culture of two companies. And Disney and Pixar were able to manage this without any glitch:

• Both companies were able to highlight their values;
• The approach towards the merger was constructive, with Disney as it employed the talent of Pixar;
• Disney accepted the employment conditions of Pixar, which helped the talented people stayed;
• The communication between the executive teams from both sides was effective.

Manage change through suits versus slacks:

Iger in this deal was ready to accept the relaxed atmosphere of Pixar. In most cases, we see the dominant force in mergers but Disney accepted the t-shirt and slacks approach of Pixar as its strength.

Disney accepted the old employment agreement of Pixar and its employees were not forced to sign s new employment agreement. A whole ream of promises was made by Disney. After the year executives of Pixar reviewed the list of promises and found that each and every promise was kept. This confirmed the trust and Pixar become more comfortable in doing things in Disney’s way.

The corporate culture of Pixar remained intact:

The deal between Disney and Pixar allowed Pixar’s employees to use the same email id as before. It didn’t consume the advantages of Pixar. Pixar’s identity was not taken away. And in return, Disney encouraged Pixar to produce more than one movie in a year.

Utilization of merged strength:

It’s obvious for the employees of the company that is getting acquired, to get nervous as in most of the mergers there is a vast change in the working environment.

But the merger of Disney and Pixar was unique in itself, here Disney asked Pixar for how things should be done. Iger asked Senior Pixar employees “how to improvement can be done in underperforming divisions of Disney?” and made the best use of them. Pixar has to focus on the improvement to be made in an animation department and computer-generated animations.

Disney’s potential to utilize the assets of Pixar:

The foremost reason behind the success of the Disney and Pixar merger is that investors were able to see the potential of Disney to leverage the computer-animated character of Pixar to be used in Disney’s vast network market. We can see the example of “Cars”, the revenue generated by it was around $5 million. Pixar developed movies as well as the sequels of original movies. Of course, the experience of Iger in merging the companies helped a lot. 

The revenue generated after the merger speaks for itself, indicating that this is one of the most successful mergers at present. The projects like Incredibles 2, Toy Story4 have surpassed the revenue of $1 billion.

The list below provides the revenue generated by the movies after the merger of the two companies:

Release Date	Title	Production Budget	Worldwide Box Office
March 6, 2020	Onward	$200,000,000	$127,912,438
June 21, 2019	Toy Story 4	$200,000,000	$1,073,080,329
June 15, 2018	Incredibles 2	$200,000,000	$1,242,805,359
November 22, 2017	Coco	$175,000,000	$798,237,597
June 16, 2017	Cars 3	$175,000,000	$383,541,369
June 17, 2016	Finding Dory	$200,000,000	$1,025,006,125
November 25, 2015	The Good Dinosaur	$187,500,000	$333,771,037
June 19, 2015	Inside Out	$175,000,000	$855,038,387
June 21, 2013	Monsters University	$200,000,000	$743,455,810
June 22, 2012	Brave	$185,000,000	$554,606,532
June 24, 2011	Cars 2	$200,000,000	$560,155,383
June 18, 2010	Toy Story 3	$200,000,000	$1,068,879,522
May 29, 2009	UP	$175,000,000	$731,463,377
June 27, 2008	Wall-e	$180,000,000	$532,508,025
June 29, 2007	Ratatouille	$150,000,000	$626,549,695
June 9, 2006	Cars	$70,000,000	$461,630,558

Source: The number

Conclusion

The merger of Walt Disney and Pixar is one of the most successful corporate mergers in these years. This acquisition was of benefit for both companies. For Disney, it was of benefit because of innovative ideas in the animation studio and the technology Pixar had. This merger had given many blockbuster movies till now. The main reason for the success of the merger was the negotiations done by both companies.

References

1. https://www.slideshare.net/SharanShah3/disney-and-pixar-merger
2. https://daniellock.com/avoid-change-management-failure/
3. https://www.the-numbers.com/movies/production-company/Pixar
4. https://www.ukessays.com/essays/media/disneys-acquisition-of-pixar-media-essay.php
5. https://www.slideshare.net/ericmoon/the-walt-disney-company-and-pixar-inc-to-acquire-or-not-to-acquire
6. https://dokumen.tips/documents/disney-pixar-case.html

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