MERGERS AND ACQUISITIONS, PART IV

Mergers and Acquisitions, Part IV

FIN 444
December 15, 2014
Clifford Friedman

MERGERS AND ACQUISITIONS, PART IV

Mergers and Acquisitions, Part IV

Mergers and acquisitions are a normal part of organizational growth and development in
the business environment. Mergers and acquisitions provide a way for companies to obtain
access to resources, technology, talented and skilled employee knowledge, and most importantly
to an increased market share (Hussey, 2013). When one hears the words mergers and
acquisitions, the initial thought will be two companies coming together as one, simple. However,
many times that is not case. The joining of two organizations can be a highly tedious task. The
acquiring company needs to consider and evaluate many aspects of each business along with the
aspects of merging or acquiring. The acquiring company must have a strategy and contingency
plans for a merger or acquisition. Identifying the right company to acquire or merge with is
crucial for both companies. Attempting a merger with the wrong company can damage both
their reputations, contribute to the loss of business, and in some cases, one or both companies
can permanently close their doors. The acquiring company must delicately balance governance
and ethical issues. Another important component to be properly addressed is each companys
culture and their employees. Many mergers fail because of corporate culture.
Human capital and organizational cultures
In merging or acquiring companies, the board of directors and upper management must
consider many factors to accomplish a successful merger. Two very important factors include
the companys culture and their employees. According to Investopedia, The concept of human
capital recognizes that not all labor is equal and that the quality of employees can be improved
by investing in them (Human Capital, 2014, para 1). Without talented and skilled employees

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companies would not be able to gain a competitive advantage over their competitors or gain
substantial market share. Talented workforce was one of the driving forces behind the Disney
Pixar merger. Disney wanted to gain the computer-generated technology and the creative
employees behind that technology. Disney needed the computer-generated technology to gain
competitive advantage.
The initial negotiations were at best strained because of the relationship of Steve Jobs and
Michael Eisner, which at times was harsh and embroiled in distrust. It was not until 2005 that
merger talks resumed when Robert Iger was named as Chief Executive Officer of Disney. Iger
was an intricate part of the negotiations as he spoke candidly and openly about the lessons he
learned from the two takeovers he endured. He had experienced both positive and negative
aspects of the takeovers. There is an assumption in the corporate world that you need to
integrate swiftly, Mr. Iger said. My philosophy is exactly the opposite. You need to be
respectful and patient (Barnes, 2008, para 36). Igers success for integration was his decision to
give the newly acquired companys personnel additional duties. Disney would embrace the new
workers and release them to other parts of the company and letting them flex their muscles
instead of just purchasing them and moving on to other business.
The other important component is the companys culture. Each company has their own
unique culture. A companys culture could be corporate or entrepreneurial; it may be
freewheeling or strict. The culture could be sales based or creative based. Investopedia states
that corporate culture is the beliefs and behaviors that determine how a company's employees
and management interact and handle outside business transactions (Corporate Culture, 2014,
para 1). The culture can be expressed through client relations, client satisfaction, and operational

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aspects to name few. In the Disney Pixar merger, Disney implemented a steering committee,
whose primary function was to oversee feature animation at both studios and to help maintain the
Pixar culture, among other duties. Iger agreed to an extensive list to protect Pixars creative
culture. Some of those stipulations included Pixars studio remaining in Emeryville, California
with the Pixar name in front. Other concessions included Pixar employees were not required to
sign employee contracts, and they retained their relatively plentiful health benefits. Also, the
films created after the merger will be branded as Disney Pixar. For this merger, Disney has kept
to its word in acquiring Pixars technology and protecting Pixars creative talent by autonomy
from Disney (Barnes, 2008).
Contingency Plans
A contingency plan is an alternate plan that can be employed to assist companies in
overcoming anticipated or unanticipated obstacles or opposition to the activity. The Disney and
Pixar merger faced obstacles after the production of Toy Story 2. When Disney and Pixar merged,
there was an agreement of three computer animated feature film. Disney and Pixar had the first
disagreement with the released of Toy Story 2 because it was not part of the three computer
animated feature film with Disney. Toy Story 2 was originally intended as a straight to video
release and Pixar demanded the film to be counted toward as the three picture agreement, but
Disney refused (New York Times, 2008). This was a major barrier to the completion of the
merger.
No contingency plan would have eliminated the concerns possessed about the Disney and
Pixar merger. After the merger was announced, Pixar complained that the arrangement was not
equitable. An option to make the merger process proceed more quickly would have been for both
corporations to downsize before the merger was announced. In early 2004, the two companies

MERGERS AND ACQUISITIONS, PART IV

then attempted to reach new agreements. As the new deal between Disney and Pixar, the deal for
Disney was only for distribution as Pixar intended to control production. More importantly, as
part of the new distribution agreement with Disney, Pixar demanded control over the films under
the old agreement including Incredibles, and Cars (New York Times, 2008).
Disagreements between Steve Jobs and the chairman and CEO of Disney Michael Eisner
made the negotiations more difficult than might have been (New York Times, 2008). In the mid2004 the two companies broke down, with Jobs declaring that Pixar was seeking for other
partners than Disney. After a lengthy negotiation Pixar did not enter in negotiation with other
distributors. In the end, however, the outcome of the merger would have been the same. Disney
would still have divested many of their interests, and would have no way of knowing if it was
enough to satisfy Pixar until the merger proposal went under review. Making premature
divestitures could have ended up costing Disney and Pixar time and money in the merger
process. It is possible that more assets would have been sold than necessary prior to the merger.
Governance Issues
The talks about a merger failed to emerge due to differences between Eisner and Jobs. In
2005, when the talks resumed, Iger (Eisners replacement) and Jobs took the previous concerns
and made sure that all issues were addressed. The biggest issue was the cultural differences. If
the cultural differences were not addressed from the start and the merger took place, then the
future growth and success of the combined company could be affected. Pixar also felt that
Disney would come in and take over the animations. Many of the things that were becoming an
issue came out of loss of trust between the two companies because of the strained relationship
between Jobs and Eisner. Iger became a pivotal figure in making sure that Pixar and Disney was
a successful merger. Disney assured Pixar would not lose any employees and the companies

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would remain separate entities with a combined entity. Disney made steps to show this by
bringing 800 Pixar employees to view the facilities and factories. Both companies worked hard
on the communication of what was going to happen and when it was going to happen every step
of the way.
Another issue was the price of the merger. Disney stockholders felt that the price as too
high. The management and financial team for Disney knew that the price would be an issue for
the stockholders but presented information that proved that the next two years would show a
profit and prove the price to be fair in the near future.
To keep the issues from preventing the success of the merger, Pixar hired Credit Suisse
(USA) LLC to act as a financial advisor for the merger (The Merger, 2006). Credit Suisse not
only proved that the price that was being paid was fair and accurate for Pixar shareholders but
also Disney shareholders. Credit Suisse looked at the historical trading volume and exchange
ratio of trading prices of Pixars and Disneys common stock. The report that Credit Suisse
presented was both beneficial to Pixars and Disneys shareholders in terms of trust and eased the
pain of the price tag.
Strategy
If Disney and Pixar never merged, either company would continue to be successful.
However, each company had what the other was missing. Disneys strategy, before the merger,
was to partner up with Pixar to boost slumping animated movie sales. Pixars strategy was to use
Disneys financing, distribution chain, and name recognition to promote its films.

MERGERS AND ACQUISITIONS, PART IV

Another strategy of Disney was to cultivate the products Pixar produces. Disney achieved
this by preserving the unique creative culture, talent, and technology that Pixar possesses by
allowing them operate autonomously. Many critics say Disney paid too much for Pixar at 7.4
billion dollars, but it was very beneficial long-term for several reasons. It eliminated Pixar as a
competitor, and it gave access to new animation technology, and it synergistically rejuvenated
Disneys animation division as well (Shaw, 2014). The merger was a huge success and will pay
big returns for years to come.
Best Practices
Best practices are the recommended course of action in certain circumstances. These
guidelines cover areas such as ethics, professional, operational, the legal aspects of business and
also lay out the most efficient path to resolutions. Not all methods, processes or strategies are
expressly written and are only ingrained in the culture. Best practices, by any organization, are
constantly changing; what worked yesterday may not be advisable today.
Pixars staff generates tens of thousands of ideas for every movie. There are many facets
of the making of a film: performance, character design, backdrop, colors and lighting effects.
Pixar best practices encourage creativity on every level of production. Producers and directors
organize and choose what ideas to use.
Another best practice that Pixar emphasizes is the freedom to communicate with anyone.
Their contention is that associates should be able to consult with each other to solve problems
and exchange ideas. The managers biggest challenge is to relinquish that control and trust the
associates to work out issues and not have to go through the proper channels. Although this

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best practice sounds like chaos to most executives and would not be accepted by most
organizations, it has been successful for Pixar (Catmull, 2008).
Disneys culture and best practices are far different than that of Pixars. Some of the areas
of emphasis are recruiting standards, training, recognition, and understanding expectations and
rewarding employees. One of the main points in employee expectations is communication
protocol. Every department communicates differently internally, but there is a fixed standard of
communicating and reporting externally (Jones, 2012). Although Pixar's decides their
communication and internal reporting procedures Disney will dictate how they report externally.
Conclusion
Life can be a gamble every day and this gamble can become even more unstable when
working with money, human factors and decisions that affect more than just one person. Disney
and Pixar were already family oriented in the media and entertainment industry. Both were
successful as separate entities and hoped that the merger would make both companies even more
successful. With the failure of other media and entertainment companies, the companies were
stringent in making sure that not only shareholders and management was happy with the merger,
but also the employees. A successful merger takes place when all avenues are reviewed and
evaluated. Disney and Pixar looked at the failures of other mergers, the end result for each
company, the financial aspect on shareholders and employees and the ultimate goal of success.
They hired outside sources that provided an unbiased opinion and provided reports that were
available to everyone that showed an interest in the merger. In the end, Disney Pixar has not only
showed a monetary improvement, but also an industry improvement. This merger has provided
adults and children with movies that have enhanced Pixar technology while keeping family

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valued entertainment. The merger also solved the misconception about possible clashing of
corporate culture. The companies took the positives from each company and produced a team
that is taking leaps and bounds in the media and entertainment industry. Success is not just
measured how much money is made. It is measured by how companies go about making the
money. Disney accepted the fact that it needed something extra for the company to remain
competitive and Pixar knew it needed a distribution system to get their technology inclined
movies to the box offices. It was not just about money, it was about the consumer, the employees
and the shareholders.

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References
Barnes, B. (2008). Disney and Pixar: The Power of the Prenup. Retrieved from
http://www.nytimes.com/2008/06/01/business/media/01pixar.html?
pagewanted=all&_r=1&
Catmull, E. (2008). Harvard Business Review. Retrieved from https://hbr.org/2008/09/howpixar-fosters-collective-creativity
Corporate Culture. (2014). Retrieved from http://www.investopedia.com/terms/c/corporateculture.asp
Human Capital. (2014). Retrieved from http://www.investopedia.com/terms/h/humancapital.asp
Hussey, J. (2013). Disney-Pixar. Retrieved from
http://jackhusseyyy.wordpress.com/2013/02/01/disney-pixar/
Jones, B. (2012). Disney Institute. Retrieved from https://www.trainingindustry.com/media/
3532077/ Disney people managementlessons.pdf
http://www.nytimes.com/2008/06/01/business/media/01pixar.html?pagewanted=all
Shaw, L. (2014). The Wrap. Retrieved from http://www.thewrap.com/frozen-pixar-disney/
The Merger. (2006, February). Edgar Online. Retrieved from http://sec.edgar-online.com/waltdisney-co/s-4-securities-registration-business-combination/2006/02/17/section17.asp