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Case Story of Disney & Pixar in the early 2000's- What can we learn from them?

Updated: Sep 6, 2020

What we can see below is the current portfolio looks like. Let's go back in time to see how Disney started.

Disney’s current portfolio
Disney’s current portfolio

Walt Disney was born in 1901. He enjoyed drawing and worked as an apprentice at Kansas City commercial art studio. He had a troubled relationship with his father so much so that he chose to prefer a work trip over his funeral. In 1910, he started the first cartoon business with his brother Roy. Roy handled the money & Walt was the creative force. They named the company ‘Laugh-O-Gram Studios’, in 1920, but the company went bankrupt a couple of years later.


With the loss of his first business, Disney packed his bags, and with just $40 to his name, took off to Los Angeles to try his hand at acting. But he failed at that, too. Still, there was a silver lining to his move. Noticing there weren’t any animations studios in California, Disney convinced Roy to join him out West so they could set up shop. Not so long after, Disney found his first major success with the creation of Oswald the Lucky Rabbit. Oswald, the lucky rabbit became the first major hit in 1927.


Oswald (1927)
Oswald (1927)

Disney’s character Oswald was plenty lucky, becoming a huge star in one-reel animation, but Disney himself would find his luck had run out. Traveling to New York to renegotiate his contract, he discovered that his producer had taken his team of animators from under him and that he no longer had any legal rights to Oswald the Lucky Rabbit. Hence, copyright infringement by distributors shut Disney out of the Oswald franchise. But instead of fighting the loss or plotting his revenge, Disney decided to walk away and start over again. It was on the train ride back to California that he created Mickey Mouse.


Bankers rejected the concept of his famous mouse over 300 times before one said yes. Despite this, the company was strapped for cash, so it licensed Mickey Mouse for the cover of a pencil tablet.

Mickey Mouse
Mickey Mouse

Disney ventured into full-length feature films. Disney returned with a bold new idea: He would develop a full-length animation feature, which he’d call Snow White and the Seven Dwarfs (1937). It would become a huge success at the box office, yet the films that followed — Pinocchio (1940), Fantasia (1940), and Bambi (1942) — would end up being duds. Disney didn’t already have enough burdens to shoulder, more were on the way. His animators went on strike at the start of World War II and contributed to his mounting debt that ran upwards of $4 million dollars. After the war was over, his company was slow to rebuild, but during this time, Disney learned to diversify his business by turning to television, despite pressures from the film studios to stay on the big screen.


His gamble paid off. With the success of TV shows like The Mickey Mouse Club and Davy Crockett, Disney was able to harness enough capital to launch his biggest venture yet: Disneyland. In 1940, Disney went public. Disney started another theme park in Orlando, Florida and targeted both adults & kids. Disney started bringing live shows such as Disney on parade/ice and even opened in-house travel co. to generate traffic in resorts. For the next 15 years, Disney showed massive growth. This period was characterized by rapid market expansion, further diversification and geographical expansion.


Period of turmoil


Disney started with producing sequels instead of new productions. There was a decline in the film division.


  1. Financial performance was deteriorating and son of Roy Disney resigned from the board of Directors

  2. Tenders were made to sell company assets and offers were made by Steinberg & Irwin Jacobs, corporate raiders, etc.

  3. Sid Bass Invested $365 million in the company, rescued the co. and reinstated Roy E Disney to the board, ending hostile takeover attempts.

  4. Eisner named Disney’s Chairman & CEO and targeted 20% return on stakeholder equity, with a focus on managing creativity.

  5. Death of Frank Well, COO in a helicopter crash. Loss of Katzenberg as head of the film division, after which he joined the biggest competitors in animation, Dreamworks.


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How could Disney recover from such a period of turmoil and decline?


Pixar & Disney


The story at Pixar: John Lasseter, Brad Bird, Pete Docter, and many more Pixar folks are alumni of the animation program at CalArts, which was founded by Walt Disney himself. Disney films were also incredibly influential to co-founder Ed Catmull in his childhood. Additionally, back in the 1980s, Pixar and Disney collaborated on software for computer-assisted 2D animation production. This software replaced the old cell painting technique used at Disney and was run on Pixar Image Computers.


Pixar’s first feature film Toy Story was co-produced with Disney as part of a deal in 1991. The deal said Pixar would produce three films and Disney would fund, market, and distribute them. Under this deal, Disney owned all story and sequel rights which were seriously disagreeable for Pixar. At one point, Disney executives said they would eventually make sequels to all of Pixar’s films with or without Pixar’s involvement. This did not go well with Pixar.


Continuing in the footsteps of Toy Story’s success are further insanely great animated movies: A Bug’s Life, Toy Story 2, Finding Nemo, while all that Disney has managed to roll out afterwards are flops after flops under its CEO Michael Eisner.


Michael Eisner ruined Disney’s animation department and failed to live up to the original animated movies’ spirit. Then suddenly, there was nothing on the table. All the characters that Disney had seen during the Disneyland Hong Kong Parade were completely from Pixar movies, and none from the Disney flops.


Should Disney do an agreement with Pixar?


Let’s evaluate the same using Mckinsey’s M&A Merger Management practice framework


Disney would benefit by owning the world’s most innovative computer animation studio, and Pixar would benefit from Disney’s cushy financial safety net and first-class distribution network.


Pixar lacked the distribution network and marketing. This acquisition combines Pixar’s preeminent creative and technological resources with Disney’s unparalleled portfolio of world-class family entertainment, characters, theme parks and other franchises, resulting in vast potential for new landmark creative output and technological innovation that can fuel future growth across Disney’s businesses. Garnering an impressive 20 Academy Awards, Pixar’s creative team and global box office success have made it a leader in quality family entertainment through incomparable storytelling abilities, creative vision and innovative technical artistry.


Framework:

McKinsey M&A Framework
McKinsey M&A Framework

Evaluating Disney using framework:

McKinsey M&A Framework for Disney
McKinsey M&A Framework for Disney


How did the deal happen? How did the deadlock break?


The deal happened after the Disney Board decided to appoint Bob Eiger as Michael Eisner’s successor in Disney. Eiger called Steve Jobs and John Lassetter, telling both that he was interested in making a deal with Pixar.


Steve Jobs was excited. He liked Eiger a lot. Eiger was straight-forward and drama-free. He’s always had good relations with Eiger and the Disney Board. After opening a Disneyland in Hong Kong, and having replaced Michael Eisner, Bob Eiger went back to the Disney HQ in Burbank and concluded that they were losing money in their animation department. There were wild hits like The Lion King, Mulan, and Aladdin.


Pixar President Ed Catmull will serve as President of the new Pixar and Disney animation studios, reporting to Bob Eiger and Dick Cook, Chairman of The Walt Disney Studios. In addition, Pixar Executive Vice President John Lasseter will be Chief Creative Officer of the animation studios, as well as Principal Creative Advisor at Walt Disney Imagineering, where he will provide his expertise in the design of new attractions for Disney theme parks around the world, reporting directly to Eiger. Pixar Chairman.


What happened after?


CEO Steve Jobs will be appointed to Disney’s Board of Directors as a non-independent member. With the addition of Jobs, 11 of Disney’s 14 directors will be independent. Both Disney and Pixar animation units will retain their current operations and locations. Disney will also have increased ability to fully capitalize 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.


Under terms of the agreement, 2.3 Disney shares will be issued for each Pixar share. Based on Pixar’s fully diluted shares outstanding, the transaction value is $7.4 billion ($6.3 billion net of Pixar’s cash of just over $1 billion).



Disney share price
Disney share price

The Disney Board was advised by Goldman, Sachs & Co. and Bear, Stearns & Co. The Pixar Board was advised by Credit Suisse.


Business Learnings


  1. Resilience and perseverance of Disney founders

  2. Businesses and their turns

  3. Market expansion, product diversification, geographical expansion & innovation

  4. Synergies & M&A


Porter's Five Force Analysis for Disney

Porter's Five Forces
Porter's Five Forces

Diamond Framework for Disney

Strategy Diamond Framework
Strategy Diamond Framework

Disney's Strategy

Disney's Strategy Overview
Disney's Strategy Overview

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