PROJECT REPORT

DISNEY-PIXAR: PRE & POST

ACQUISITION ANALYSIS BASED ON
FINANCIAL & OPERATING
PERFORMANCE

SUMBITTED TO: - SUBMITTED BY: -

Dr. Nidhi Tanwar Tonmoy Borgohain (13105002)
Centre for Management and Humanities Sourabh Sharma
(13105008)
PEC University of Technology Punakshi
(13105010)

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 Madhusudan Singla
(13105085)
Shubham Garg
(13105093)

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 ACKNOWLEDGEMENT

First of all, we would like to take this opportunity to thank Centre for Management and
Humanities, PEC University of Technology for giving us this wonderful opportunity to
undergo a semester long project work. We deem it our privilege to have carried out this
dissertation work under this well-known quality conscious organization.

We are extremely grateful to our mentor Dr. Nidhi Tanwar (Centre for Management and
Humanities, PEC University of Technology) for giving us the opportunity to carry out the
project under her guidance. Our sincere thanks to her for the constant support, tremendous
encouragement and appreciation that further helped us understand the value and impact of the
work done by us. We owe our gratitude to her for having confidence in us to work on this
project.

A special thanks to our colleagues and friends for exchanging interesting ideas and thoughts
that made the work easy and efficient.

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 ABSTRACT

In March 2005, the Disney Board elected Iger as the company's CEO to succeed Eisner on
September 30, 2005. Iger got a call from Jobs who hinted at a possible discussion on working
together again. Analysts felt that Iger would find it difficult to strike a new deal as proposed
by Jobs as it was heavily loaded in favor of Pixar.

However, Iger adapted the proposal his own way. He asked for Disney's content to be
distributed over the Internet through Apple's online store - iTunes. In October 2005, Iger and
Jobs signed a deal to sell the past and current episodes of television shows of its ABC and
Disney channels through iTunes. It started with five shows which included the popular shows
Desperate Housewives and Lost. Jobs was pleased with Igers suggestion of linking up to
offer videos through iTunes. Iger said that the deal with Apple was finalized in just three
days. Meanwhile, Jobs also started re-negotiating on the Disney-Pixar agreement. With this
rapprochement, there was speculation that Disney might acquire Pixar.

As it was thought the acquisition happened when Disney announced on January 24, 2006 that
it had agreed to buy Pixar for approximately $7.4 billion in an all-stock deal. Following Pixar
shareholder approval, the acquisition was completed May 5, 2006. The transaction catapulted
Steve Jobs, who was the majority shareholder of Pixar with 50.1%, to Disney's largest
individual shareholder with 7% and a new seat on its board of directors. Jobs new Disney
holdings exceed holdings belonging to ex-CEO Michael Eisner, the previous top shareholder,
who still held 1.7%; and Disney Director Emeritus Roy E. Disney, who held almost 1% of the
corporation's shares. As a result of the merger, each of the Pixar shares had been converted
into the right to receive 2.3 shares of The Walt Disney Company common stock.

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 Table of Contents
ACKNOWLEDGEMENT.........................................................................................................2

ABSTRACT...............................................................................................................................3

INTRODUCTION......................................................................................................................5

1.1 General Introduction.........................................................................................................6

1.2 Pixars Involvement..........................................................................................................7

1.3 The Evolution of Walt Disney..........................................................................................9

LITERATURE REVIEW.........................................................................................................11

NEED OF THE STUDY..........................................................................................................14

OBJECTIVES OF THE STUDY.............................................................................................17

RESEARCH METHODOLOGY.............................................................................................19

ANALYSIS AND INTERPRETATIONS.................................................................................23

6.1 Introduction....................................................................................................................24

6.2 Financial Ratio Analysis.................................................................................................24

6.2.1 Financial Ratio Conclusion......................................................................................34

6.3 Horizontal and Vertical Analysis...............................................................................35

6.3.1 Horizontal Analysis............................................................................................35

6.3.2 Vertical Analysis.................................................................................................36

6.4 DuPont Analysis.............................................................................................................36

6.4.1 DuPont Analysis Components.................................................................................37

6.5 Porters Five Forces Analysis.........................................................................................38

6.5.1 Disneys Industry Analysis......................................................................................38

6.5.2 Pixars Industry Analysis.........................................................................................39

6.6 Conclusion......................................................................................................................40

CONCLUSION........................................................................................................................42

SUGGESTIONS......................................................................................................................44

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REFERENCES AND BIBLIOGRAPHY................................................................................46

CHAPTER 1

INTRODUCTION

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1.1 General Introduction
In the wake of stagnating share price, Walt Disney Corporation sought to revive its animation
capabilities as investors flocked to more successful animation studios such as Pixar
Animation Studios and DreamWorks Inc. Disneys efforts in animated films in recent years
have been disappointing. Disney and Pixar had been in a joint venture involving three
pictures since 1991, in which Disney shared the production costs and profits. Disney
benefited from Pixars success by co-financing and distributing Pixar films. Talks to extend
this arrangement disintegrated in 2004 due to failure of Pixar CEO Steve Jobs and Disney
CEO Michael Eisner to reach agreement on allowing Pixar to own films it produces in the
future.

With the current distribution agreement set to expire in June 2006, Robert Iger, Eisners
replacement, moved to repair the relationship with Pixar. Consequently, a deal that was
unthinkable a few years earlier became possible. Disney announced the acquisition of Pixar,
one of the most successful moviemakers in Hollywood history, on January 25, 2006. The
move reected Disney's desire to infuse the rms internal animation resources with those
from a proven animation company. A key Disney strategy is to use popular Disney movie
characters across different venues (i.e., theme parks, merchandise, and television). Disney
exchanged its stock for Pixar shares in a deal valued at $7.4 billion for the Pixar stock or $6.4
billion including $1 billion of Pixar cash that Disney would receive.

Despite nearterm dilution of Disney's earnings per share by as much as 10 percent,

investors seem focused on the longterm impact to growth in Disney's shares. Disney's
shares rose 1 percent on news of the announcement. Nevertheless, the risk associated with the
transaction can be measured in terms of what Disney could have done with the cash raised by
issuing the same number of shares to the public. At $6.4 billion, Disney could make 64
sequels at $100 million each. Moreover, Disney was probably paying top dollar for Pixar, as
the filmmaker was coming off a string of six consecutive movie blockbusters. Finally,
revenue from DVD sales might have been maturing.

The long-term success of the combination hinges on the ability of the two firms to meld their
corporate cultures without losing Pixar's creative capabilities. Pixar president, Ed Catmull
would become president of the combined Pixar-Disney animation business. John Lasseter,

7
Pixar's creative director, would assume the role of chief creative officer of the combined
firms, helping to design attractions for the theme parks and advising Disney's Imagineering
division. In an effort to insulate the Pixar culture from the Disney culture, Pixar would
remain based in Emeryville, far from Disney's Burbank, California, headquarters. As a
condition of the closing, all key Pixar employees would have to sign long-term employment
contracts.

As part of the deal, Pixar chairman and chief executive Steve Jobs, holder of 50.6 percent of
Pixar stock, would become Disney's largest individual shareholder, at about 7 percent of
Disney stock, and a member of Disney's board of directors. Job's advice was hoped to
rejuvenate the Disney board at a time when the entertainment industry was scrambling to
reinvent itself in the digital age. Job's, who is also the chairman and CEO of Apple Computer
Inc. (Apple), is in a position to apply Apple's substantial technical skills to Disney's
animation effects.

It was unclear if Disney could not have achieved many of these benets at a much lower cost
by partnering with Pixar and offering Steve Jobs a seat on the Disney board. Ultimately, the
opportunity to prevent Pixar's acquisition by a competitor may have been the primary reason
why Disney moved so aggressively to acquire the animation powerhouse.

1.2 Pixars Involvement

Pixar began in 1979 as the Graphics Group, part of the Computer Division of Lucas film
before it was acquired by Apple co-founder Steve Jobs in 1986 shortly after he left Apple
computer. Jobs paid $5 million to George Lucas and put $5 million as capital into the
company. Initially, Pixar was a high-end computer hardware company whose core product
was the Pixar Image Computer, a system primarily sold to government agencies and the
medical community. One of the buyers of Pixar Image Computers was Disney Studios, which
was using the device as part of their secretive CAPS project, using the machine and custom
software to migrate the laborious ink and paint part of the 2-D animation process to a more
automated and thus efcient method.

As poor sales of Pixars computers threatened to put the company out of business, animation
department began producing computer-animated commercials for outside companies. In April
1990 Job's sold Pixar's hardware including all proprietary hardware technology and imaging

8
software, to Viacom Systems. In 1991, after a tough start of the year when about 30
employees in the company's computer department had to go (including the company's
president, Chuck Kolstad), Pixar made a $26 million deal with Disney to produce three
computer-animated feature lms, the first of which was Toy Story, animation department,
who made television commercials and a few shorts for Sesame Street, was all that was left at
Pixar animations. Despite the total income of these products, the company was still losing
money, and Jobs often considered selling it, even as late as in late 1994 he contemplated to
sell Pixar to other companies, Microsoft being one among them. Only after confirming that
Disney would distribute Toy Story for the 1995 holiday season did he decide to give it
another chance. The lm went on to gross more than $350 million worldwide. Later that year,
Pixar held its public offering on November 29, 1995, and the company's stock was priced at
US$ 22 per share. The public offering was a strategic decision to increase the working capital
of the company, with $140million.

A discussion after Toy Story revealed that there was a growing rift, with animators feeling
stied by producers and producers feeling animators thought of them as second class citizens
(a problem not no different from similar issues between suits and coders that sometimes
happen in software development). Catmulls conclusion was that in enjoying success it was
easy to look at what works and focus on its replication but that for the health of the company
it was equally if not more important to ask what isn't working. Since Toy Story, after every
project Pixar has a detailed, open dialogue to consider parts of the process, or areas of the
company need fixing. Catmull characterized the communication as difficult but valuable.

It's partly for that reason that Pixar movies intentionally are made to appeal to both adults and
children. Children are used to hearing thing they don't understand and they listen to things
over and over again because they're trying to gure out the world. If you talk down to
children, they know they're being talked down to, and adults can't listen to it. So instead, we
make lms that we can enjoy. By the virtue of the fact they're animated, we do put in physical
humor, which children love, and we don't put in things that would turn families off, clearly.
But in terms of the dialogue, we put in things that adults understand. And by putting in things
that we enjoy, that we want to see, and then having it for the physical comedy that all of us
like, then it has a, it touches people in a very broad way." That broad appeal expands the
target market which is shrewd business but it's also very attentive to the customer's needs;
that is, needs of both parent and child.
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1.3 The Evolution of Walt Disney
Unlike Pixar Animation Studios, Walt Disney was an eight-decade old established
entertaining company dating back to the silent era. In 1923, Walt Elias Disney arrived in
California from Kansas City, bringing with him an animation lm, Alice's Wonderland. On
October 16, 1923, MJ Winkler, a distributer, agreed to distribute the Alice Comedies and
bought each character for US$ 1,500. Later the name was changed to Walt Disney Studio. In
1927, after making Alice Comedies for four years, Walt created a new diameter called
Oswald the Lucky Rabbit to start a new animation series. By this time, Winkler had handed
over the business to her husband Charles Mintz.

After a year, as Oswald gained popularity, Walt tried to re-negotiate his contract for higher
money. However, by that time, Mintz had poached Walts employees to create an Oswald's
series in his own studio. Walt also learned that he did not legally own the rights for Oswald.
When Mintz demanded that Walt should work exclusively for him, Walt refused and parted
ways. After his break-up with Mintz, Walt wanted to create a character stronger than Oswald.
He visualized a new character in the form of a mouse and planned to name it 'Mortimer,' but
on his wife's suggestion changed it to 'Mickey.' This marked the birth of the world famous
'Mickey Mouse (Mickey). Initially, it was it was not easy for Walt to sell the new mickey to
the distributors as it had to compete with the popular Felix the Cat and Oswald. Walt's first
animation lm featuring Mickey, Plane Crazy (released in May 1928), failed to impress the
audience who felt that Mickey resembled Oswald closely. Walt created the second Mickey
feature film titled The Ilopin' Gaucho, but couldn't nd distributors, but Disney's third
Mickey short, Steamboat Willie, was produced with synchronized sound and became a
runaway success when it premiered in New York in late 1928.

Using the prots from Snow White, Disney financed the construction of a new 51-acre studio
complex in Burbank. The new Walt Disney Studios, in which the company is headquartered
to this day, was completed and open for business by the end of 1939. The following year,
Walt Disney Productions had its public offering. Disney ended its distribution contract with
RKO in 1953, forming its own distribution arm, Buena Vista Distribution. In 1954, Walt
Disney used his Disneyland series to unveil what would become Disneyland Park, an idea
conceived out of a desire for a place where parents and children could Both have fun at the
same time. On July 18, 1955, Walt Disney opened Disneyland to the general public. On July

10
17, 1955 Disneyland was previewed with a live television broadcast hosted by Art Link-
Letter and Ronald Reagan. After a shaky start, Disneyland continued to grow and attract
visitors from across the country and around the world. A major expansion in 1959 included
the addition of Americas first monorail system. In November 1965, Disney world was
announced, with plans for theme parks, hotels, and even a model city on thousands of acres
of land purchased outside of Orlando, Florida.

Despite the success of the Disney Channel and its new theme park creations Walt Disney
Productions was financially vulnerable. Its lm library was valuable, but offered few current
successes, and its leadership team was unable to keep up with other studios, particularly the
works of Don Bluth, who defected from Disney in 1979. In 1984, nancier Saul Steinberg
launched a hostile takeover bid for Walt Disney Productions, with the intent of selling off its
various assets. Disney successfully fought off the bid with the help of friendly investors, and
Sid Bass and Roy Disney's son Roy Edward Disney brought in Michael Eisner and Jeffrey
Katzenberg from Paramount Pictures and Frank Wells from Warner Bros. Pictures to head up
the company.

But this was the end for the hostile takeover bid for Walt Disney On February 11, 2004;
Comcast surprised the media industry by announcing an unsolicited $66 billion bid for The
Walt Disney Company a deal that would have made Comcast the largest media conglomerate
in the world. After rejection by Disney and uncertain response from investors, the bid was
abandoned in April. The deal would have also required Comcast to sell off either the
Philadelphia Flyers (which they own through Comcast Spectator) or the Disney-owned
Mighty Ducks of Anaheim, since they wouldn't be permitted to own two NHL teams. It was
later discovered that the deal was mostly for Comcast to acquire one of Disney's most
profitable operations, ESPN, in an attempt to expand its sports reach. Comcast has since
opted to rename OLN as versus and expand their sports coverage with the Tour de France and
the NHL. Comcast's NHL deal also obligated them to launch a U.S. version of NHL Network
by the summer of 2007. The network finally launched in October 2007. Disney later sold the
Now-Anaheim Ducks to Henry Samueli in 2005 in an unrelated transaction.

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CHAPTER 2

LITERATURE
REVIEW

12
Helane Crowell [2010] The objective behind this research was to analyze and evaluate
ABCs situation post acquisition from Disney. This was achieved by performing a portfolio
analysis using the BCG matrix which helps in analyzing the market share and market
growth of Disneys products and solutions. Further a Porters five forces model had been
applied to analyze the level of competition within the industry and business strategy
development and how these forces affected ABC. Using these models Blaisdell consulting did
a preliminary analysis. The preliminary analysis showed how Disneys stock prices could not
be sustained during and post-recession in 2001-2002. The analysis shows that ABC has
dropped from the top three networks and hasnt been able to recover since.

Frankie Evans [2014] The main objective of this paper is to analyze the impact on both
companies post acquisition, which are Lucas Film and Walt Disney Company. The
methodology used for this analysis was the SWOT (Strengths, Weaknesses, Opportunities &
Threats) analysis technique. The acquisition of Lucas Films by Walt Disney Company
happened in 2012 for an amount of $ 4.05 billion. The main reasons behind this acquisition
was to exploit synergy and ensure the companys survival as with this acquisition, Lucas
Films franchise of Star Wars can continue to leave a legacy for every family and with being
acquired by the largest leading diversified international family entertainment, the franchise
can grow nationwide and can bring in more revenue.

Joseph Calandro Jr.[2015] The objective behind this article is to assess the value and risks
of Disneys 2009 $4 billion acquisition of the Marvel Entertainment Group (Marvel) in a case
study utilizing the modern Graham and Dodd valuation approach and profiling the phase-by-
phase progression of buyouts from the classic phase to the present time. The methodology
used to present a detailed valuation of Marvel in 2009 is drawn upon previously published
Graham and Dodd methodological materials and Marvels publicly available financial reports
wherein balance sheets, income statements and ratio profiles have been worked upon. Also,
creating value from such a deal mandates intensive management of both sides of balance
sheet in an integrated manner, as well as an appreciation of the interactive dynamics of doing
so over time. It also concludes that wherein private equity was founded through financial
leverage after acquisition, a more balanced debt-equity-cash ratio would have led to better
results.

13
Tehreem Ilyas [2014] The objective behind this research was to analyze the effect of
acquisition on the financial situation of The Walt Disney and Pixar. This is done by
comparing the various financial ratios of different years. Financial ratios are analyzed deeply
from the year 2006 to 2014. The various financial ratios that were analyzed are current ratio,
quick ratio, debt to equity, inventory turnover, Earning per Share, Profit margin, and Asset
turnover. In order to analyze Pixars current positioning in the industry along with
comparison of financial ratios we also conducted Porters five force analysis for animation
industry. Porter's five forces include three forces from 'horizontal' competition that are the
threat of substitute, products or services, the threat of established rivals, and the threat of new
entrants and two forces from 'vertical' competition that are the bargaining power of suppliers
and the bargaining power of customers.

Mahesh R. & Daddikar Prasad[2012] The main objective is to analyze whether the Indian
Airline Companies have achieved financial performance efficiency during the post-merger &
acquisition. In order to compare the results of the analysis, parametric statistical tests such as
the t-test is used to measure the performance of the industry as a whole two years prior to the
study period and two after that period. The authors in the paper focus on the on the
performance of Indian Airline Companies after the consolidation of Airline sector in year
2007-08. The research method used in this paper was to test influence of M&A on the
financial performance of the surviving company by considering Pre and Post M&A financial
ratios for the entire set of sample firms. For the present study relevant financial ratios are
identified and categorized into four broad groups. Each group is further classified into various
important ratios for pre & post performance analysis. The four groups included profitability
standards, financial leverage standards, liquidity standards and capital market standards.

14
CHAPTER 3

NEED OF THE
STUDY

15
To opt for a merger or not is a complex affair, especially in terms of the technicalities
involved. Before going for merger considerable amount of brainstorming would be required
by the managements to reach a conclusion. A due diligence report would clearly identify the
status of the company in respect of the financial position along with the net worth and
pending legal matters and details about various contingent liabilities. Decision has to be taken
after having discussed the pros & cons of the proposed merger & the impact of the same on
the business, administrative costs benefits, addition to shareholders' value, tax implications
including stamp duty and last but not the least also on the employees of the Transferor or
Transferee Company.

Disney currently faces difficult decision regarding its relationship with Pixar. Although
previous collaborations with Pixar have brought immense success for Disney in terms of
revenue and recognition, Pixars CEO Steve Jobs has been trying to negotiate a fairer deal
with no success. Disney wishes to stay with previous negotiation terms, as it is more
favorable for Disney. Tension has increased between the two firms, and in response, Jobs
began a searching for partnerships with other companies due to negotiation issues. This poses
a threat for Disney, and Disney must make a decision on how to manage this current situation
as soon as possible. Through our analysis, we offer five potential decisions that Disney can
make regarding this issue. These options include the full-on acquisition of Pixar, continuing
the current relationship through renegotiation of a fairer deal, creating strategic alliances with
other companies, outsourcing technology of future films, and internal development of
computer generated animation technology capabilities in-house.

To assist with the decision making process, we utilized numerous tools and frameworks in
order to thoroughly analyze situation regarding the two firms and their external and internal
factors. One of the tools we utilized was the Porters Five Forces analysis for both of the
companies. This allowed us to better understand the industry that Disney and Pixar
individually falls under, and the current situations and pressures that the firms face within
their specific industry. Aside from external analysis, we also conducted internal analysis for
both of the firms. We were able to recognize and pinpoint the similarities and differences
between the organizational structure and core capabilities that Disney and Pixar individually
operates under, and the synergies that exist between the two firms. Next, we delved deeper
and analyzed the benefits and disadvantages of the acquisition, as well as other alternative
options as mentioned previously.
16
Finally, we compared the pros and cons for each option and arrived at the best possible
decision for Disney regarding its current situation. After careful consideration, the final
decision that we recommend for Disney is to go ahead with the full-on acquisition of Pixar.
We believe that this is the best option considering the amount of value and talent that Pixar
would bring into the firm as the leader in the computer generated animation industry.
Considering the amount of success that previous collaborations brought, it is easy to see that
the relationship with Pixar is a valuable resource that Disney should not risk damaging.
Through the merge, Disney would receive access to Pixars top of the line technologic
capabilities and talented human resource, while Pixar would benefit from access to funding,
vast distribution channels, and capabilities to produce merchandise. The other options
previously mentioned each contains important flaws, and would not allow Disney and Pixar
to fully exploit their synergies while bringing potential threat to Disney in the case that Pixar
partners with a competitor.

Aside from the acquisition, we also recommend for Disney to extend a generous offer to
Steve Jobs in order to keep him happy as the would-be majority shareholder of Disney, and to
keep Pixar employees satisfied and engaged. This could be achieved by ensuring that Pixar
and Disney remain two separate entities in terms of organizational structure, protecting the
individuality of Pixar artists and maintaining the valuable culture that made Pixar what it is
today.

17
CHAPTER 4

OBJECTIVES OF
THE STUDY

18
 19
Figure 1: The Objectives of the Project
To analyze the level of competition within entertainment
industry. Position in Industry
Business strategy development to favor future prospects
of Disney
To analyze Disneys growth relative to itself over the Relative Growth
years from 1996- 2016
Analysis
To analyze pre and post performance of Disney after
acqusition of Pixar.
Operational Efficiency
The objectives of the project are threefold as follows:
CHAPTER 5

RESEARCH
METHODOLOGY

20
5.1 Period of the Study
First of all, Financial Ratios are analyzed deeply from the year 1999 to 2016. The various
financial ratios that were analyzed are current ratio, quick ratio, debt to equity, inventory
turnover, Earning per Share, Profit margin, and Asset turnover. To assist with the decision
making process, we utilized numerous tools and frameworks in order to thoroughly analyze
situation regarding the two firms and their external and internal factors.

5.2 Data Collection

This study is based on secondary data. The data has collect from published annual report of
selected worldwide companys corporate sector. Other information related to selected
worldwide companies would be collected from official website and net sources, annual
report, stock analysis, IBA Bulletin, different publication, and journals etc. Opinions
expressed in business standard, newspaper, Annual review, Accounting Literature and
different publications have been used in this study.

5.3 Statistical Tools and Techniques

In order to achieve the above mentioned goals, various analysis and factors have been used,
each one discussed briefly below:
1. Ratio Analysis: To get a grip upon the liquidity & profitability situation of Disney
various operating and financial ratios have been calculated and compared over the
years on an annual time base, pre and post the acquisition in order to
administer company's use of capital and managerial resources. The operating and
Financial Ratios considered for analysis are:

Current Ratio: The current ratio is a liquidity ratio that measures a company's
ability to pay short-term obligations.
Current Ratio = Total Current Assets Total Current Liabilities
Quick- Asset Ratio: The quick ratio measures a company's ability to meet its
short-term obligations with its most liquid assets.
Quick Ratio = (Total Current Assets - Inventory) Total Current Liabilities
Debt Equity Ratio: A high debt to equity ratio generally means that a
company has been aggressive in financing its growth with debt. This can result
in volatile earnings as a result of the additional interest expense.
Debt to Equity = Total Debt Total Equity.

21
 Inventory Turnover: Inventory turnover measures how fast the company
turns over its inventory within a year.
Inventory Turnover = Cost of Goods Sold Average Inventory
= Cost of Goods Sold ((Inventory (A: Sep. 2015) + Inventory 2)
Earnings Per Share (EPS): It is the number of earnings per outstanding share
of the companys stock.
Diluted Earnings Per Share = (Net Income - Preferred Dividends) Total
Shares Outstanding.
Return on Equity (ROE): It is calculated as net income divided by its average
shareholder equity.
ROE = Net Income ((Total Equity + Total Equity) 2)
Net Profit: Net margin is calculated as net income divided by its revenue.
Net Margin = Net Income Revenue
Interest Coverage Ratio: Interest Coverage is a ratio that determines how
easily a company can pay interest expenses on outstanding debt.
Interest Coverage = (-1) (Operating Income Interest Expense)

2. T- Test Analysis: The T-test was done to contemplate upon the actual difference
Pixars acquisition has brought upon Disney and its shareholders and how the post
data is significantly different from the pre.
A t-tests statistical significance indicates whether or not the difference between two
groups averages most likely reflects a real difference in the population from which
the groups were sampled. A statistically significant t-test result is one in which a
difference between two groups is unlikely to have occurred because the sample
happened to be atypical. Statistical significance is determined by the size of the
difference between the group averages, the sample size, and the standard deviations of
the groups. For practical purposes statistical significance suggests that the two larger
populations from which we sample are actually different.

3. Porters five Forces Analysis: Used to achieve the third objective as it aids in when
there is requirement of making a qualitative evaluation of a firm's strategic position.
This analysis works upon forces close to a company that affect its ability to serve its
customers and make a profit, thus the micro environment field. Porter's five forces
include three forces from 'horizontal' competition: the threat of substitute products or
services, the threat of established rivals, and the threat of new entrants; and two forces
from 'vertical' competition: the bargaining power of suppliers and the bargaining

22
 power of customers, thus providing all the essential perspectives to analyze the
competition and play it strategically.
4. Horizontal and Vertical Financial Analysis: More of a quantitative analysis,
wherein the trends and changes in financial statement items over time are
administered along with the common-size analysis as all of the amounts for a given
year are converted into percentages of a key financial statement component making it
viable for comparison in the industry.
5. DuPont Analysis: An equity evaluation approach to provide a fuller picture of a
company's overall financial health and performance that it provides, compared to
more limited equity valuation tools. It factors in three important performance
elements: profitability measured by profit margin, operational efficiency measured by
asset utilization (specifically asset turnover) and financial leverage measured by the
assets/equity multiplier providing a more accurate assessment of the significance of
changes in a company's ROE & ROI and hence the position in market.

5.4 Analysis and Interpretation

Financial Ratios are analyzed deeply from the year 1999 to 2016. The various financial ratios
that were analyzed are current ratio, quick ratio, debt to equity, inventory turnover, Earning
per Share, Profit margin, and Asset turnover. To assist with the decision making process, we
utilized numerous tools and frameworks in order to thoroughly analyze situation regarding
the two firms and their external and internal factors.
One of the tools utilized was the Horizontal and Vertical Analysis. In this, the 'horizontal'
competition includes the 3 forces which are the threats of substitute, products or services, the
threat of established rivals, and the threat of new entrants and two forces from 'vertical'
competition that are the bargaining power of suppliers and the bargaining power of
customers.

23
CHAPTER 6

ANALYSIS AND
INTERPRETATIONS

6.1 Introduction
Through our analysis, we offer five potential decisions that Disney can make regarding this
issue. These options include the full-on acquisition of Pixar, continuing the current

24
relationship through renegotiation of a fairer deal, creating strategic alliances with other
companies, outsourcing technology of future films, and internal development of computer
generated animation technology capabilities in-house.

Furthermore, in order to aid in our decision making process, the T-Test was done followed by
the DuPont Analysis. Both of these analysis help with the creation of a better picture. Yet
another one of the tools we utilized was the Porters Five Forces Analysis for both of the
companies. This allowed us to better understand the industry that Disney and Pixar
individually falls under, and the current situations and pressures that the firms face within
their specific industry. Aside from external analysis, we also conducted internal analysis for
both of the firms.

We were able to recognize and pinpoint the similarities and differences between the
organizational structure and core capabilities that Disney and Pixar individually operates
under, and the synergies that exist between the two firms. Next, we delved deeper and
analyzed the benefits and disadvantages of the acquisition, as well as other alternative options
as mentioned previously. Finally, we compared the pros and cons for each option and arrived
at the best possible decision for Disney regarding its current situation.

6.2 Financial Ratio Analysis

Financial ratios are the most common and widespread tools used to analyze a business'
financial standing. Ratios are easy to understand and simple to compute. They can also be
used to compare different companies in different industries. Since a ratio is simply a
mathematically comparison based on proportions, big and small companies can be use ratios
to compare their financial information. In a sense, financial ratios don't take into
consideration the size of a company or the industry. Ratios are just a raw computation of
financial position and performance.

Ratios allow us to compare companies across industries, big and small, to identify their
strengths and weaknesses. Financial ratios are often divided up into seven main categories:
liquidity, solvency, efficiency, profitability, market prospect, investment leverage, and
coverage. Financial ratios are analyzed from the year 1999 to 2016. The various financial
ratios that were analyzed are current ratio, quick ratio, debt to equity, inventory turnover,
Earning per Share, Profit margin, and Asset turnover. Our findings are divided into two

25
phases namely pre-merger phase (1999-2006) and post-merger phase (2006-2016).This
financial ratios gives the impact of merger on Disneys financial status.

1. Earnings Per Share: Earnings Per Share (EPS) is the number of earnings per
outstanding share of the companys stock. In calculating earnings per share, the
dividends of preferred stocks need to subtract from the total net income first.

26
 7

3 Earnings Per Share

-1

The t-test analysis shows that the value of P Is less than the value of our Alpha(0.05).
Also the value of t stat(Standard deviation from mean ) is more than the t critical two
tail which confirms that the data is statistically significant.

EPS has been increasing steadily in the recent fiscal years representing that
shareholders are able to earn their share of profits on a positive scale indicating
Disney as a fruitful organization for investment.

2. Inventory Turnover: Inventory turnover measures how fast the company turns over
its inventory within a year. It is calculated as cost of goods sold divided by average
inventory.

27
 60
50
40
30
20 Inventory Turnover

10
0

The t-test analysis shows that the value of P Is more than the value of our
Alpha(0.05). Also the value of t stat(Standard deviation from mean ) is less than the t
critical two tail which confirms that the data is not statistically significant.
Having high values of inventory turnover in the recent fiscal years, it indicates that
Disney is quickly able to turnover its inventory within a year representing a
significant hold on the industry

3. Current Ratio: The current ratio is a liquidity ratio that measures a company's ability
to pay short-term obligations.

28
 The t-test analysis shows that the value of P Is more than the value of our
Alpha(0.05). Also the value of t stat(Standard deviation from mean ) is less than the t
critical two tail which confirms that the data is not statistically significant.

Current Ratio has been vacillating around 1 in the recent years indicating that with
good long term prospects Disney will be able to borrow against those to meet current
short term obligations.

4. Quick Asset Ratio: The quick ratio measures a company's ability to meet its short-
term obligations with its most liquid assets.

29
 The t-test analysis shows that the value of P Is more than the value of our
Alpha(0.05). Also the value of t stat(Standard deviation from mean ) is less than the t
critical two tail which confirms that the data is not statistically significant.

Being less than 1, it implies that Disney wont be able to meet its current liabilities
with its most liquid assets in the recent fiscal years while excluding the inventory.

5. Net Profit Margin: Net margin is calculated as net income divided by its revenue.

30
 The t-test analysis shows that the value of P Is less than the value of our Alpha(0.05).
Also the value of t stat(Standard deviation from mean ) is more than the t critical two
tail which confirms that the data is statistically significant.
The significant increase over a period of time in the net profit indicates Disneys hold
over the entertainment industry as their net income has seen a growth at the same
scale as that of their sales.

6. Interest Coverage Ratio: Interest Coverage is a ratio that determines how easily a
company can pay interest expenses on outstanding debt. It is calculated by dividing a
companys Operating Income (EBIT) by its Interest Expense.

31
 60

50

40

30
Net Profin
20 Interest Coverage Ratio

10

-10

The t-test analysis shows that the value of P Is less than the value of our Alpha(0.05).
Also the value of t stat(Standard deviation from mean ) is more than the t critical two
tail which confirms that the data is statistically significant.
Disney has been able to easily pay the interest expenses on outstanding debts as
indicated by the steady increase in the interest coverage ratio over the recent fiscal
years, thus representing a strong financial strength of the company.

7. Debt to Equity Ratio

A high debt to equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.

32
 1.4

1.2

0.8
Current Ratio
0.6 Quick Asset Ratio
Debt-Equity Ratio
0.4

0.2

The t-test analysis shows that the value of P Is less than the value of our Alpha(0.05).
Also the value of t stat(Standard deviation from mean ) is more than the t critical two
tail which confirms that the data is statistically significant.

33
 Disney has a very high Debt to Equity ratio implying that it has been aggressive in
financing its growth with debt resulting in volatile earnings as a result of additional
interest expense.

8. Return on equity: It is calculated as net income divided by its average shareholder

equity.

34
 25

20

15
ROI
10
ROE
5

-5

The t-test analysis shows that the value of P Is less than the value of our Alpha(0.05).
Also the value of t stat(Standard deviation from mean ) is more than the t critical two
tail which confirms that the data is statistically significant.

The significant increase in the value over the years makes Disneys shares a good
prospect for investment, as they havent suffered major drops in their ROE values in
the recent past and thus are able to pay the profits to equity shareholders in parallel to
what they have earned.

6.2.1 Financial Ratio Conclusion

Financial ratio analyses for Walt Disney and for the entertainment- diversified industry are
provided below. The data and graphs for the following information can be obtained in Annexure
1. Comparing with Industry found that The Walt Disney Company current ratio is greater than 1,
representing that their assets can shield their liabilities. It showing increasing trend in year to year
analysis. Simultaneously this ratio for Walt Disney Company is lower as compared to the
Industry. Meanwhile the quick ratio is higher for the Walt Disney Company that the company
puts low amount of inventory as compared to industry. The Current and Quick ratios of the past
years show similar trend and are increasing for the past three years.

The Disney Companys total debt to equity is decreasing for the past few years as the company
is focusing on major part of owners equity for its operations and for the acquisitions and
takeovers. The Walt Disney Company has higher total debt to equity as compared to the industry.
Disneys inventory turnover tells the operational efficiency in the sales and the stock and it is
higher than the industry average as inventory is the least liquid form of an asset, Disney is strong
in sales & effective buying and doing more for enhancing Disneys ability to efficiently use its

35
assets to produce more revenue as its inventory turnover is high in many years. The trend of
Earning per Share is also increasing, this might show that the efficiency in the earnings and the
company is highly profitable and its net profit margin is also increasing year by year. This shows
the good health of the company as compared to the industry.

Disneys profit margin is increasing yearly indicating that they have a higher level of earnings.
Industry average is light marginally higher than Disneys. Disney's Price profit proportion is
higher than the business; this suggests that shareholders need higher income development later
on. The cost to book proportion contrasts a securities exchange's quality with its book esteem.
Disney is near the business' normal so this appears to be esteemed accurately, however one must
be mindful that this could differ by industry. Asset turnover of Disney showing that it is
performing well and it is more than the industry average. It means that Disney performing
additional to enhance its capability and efficiently using its assets to produce more revenue.

The return on assets (ROA) showing that Disneys management efficiency is increasing yearly.
This is higher than the industry average. The ROA showing that management is more efficiently
using its assets to generate more earnings. The return on equity (ROE) is increasing every year.
It is a lilted bit lowers than then the industry average. It showing that profits are using to make the
money the actual shareholders have invested. Interest coverage ratio is better than the industry
average, as the ability to pay interest is better due to the more revenue. It is substantively higher
ratio representing it can meet its debt commitments many times over.

There are various explanations to reflect when defining whether a stock is a good investment, not
just whether the unrestricted cash flows are optimistic. Disney endures to construct shareholders
wealth through making bright acquisitions and sustainable competitive advantage in the
diversified industry. The Walt Disney Company is a well-established conglomerate which stays to
be a leader in entertainment industry. So we can say that Disney Companys performing well after
the acquisition as compared to all previous years and overall it is efficiently succeeded in the
industry and most of the performance measuring ratios are better than industry which can be
easily understand by the following graphic representations.

6.3Horizontal and Vertical Analysis

6.3.1 Horizontal Analysis

A horizontal analysis, or trend analysis, is a procedure in fundamental analysis in which an
analyst compares ratios or line items in a company's financial statements over a certain period

36
of time. The analyst uses his discretion when choosing a particular timeline; however, the
decision is often based on the investing time horizon under consideration.

In Horizontal Analysis of Walt Disney, both assets & the liabilities costs went up, however
stockholders equity went down. This analysis representing that overall the company has
more assets & expenses, so the likelihoods of profit are not so high. The short term liquidity
shows that in current assets there is not a significant percent change in the current asset but
from 2010 to 2011 it as almost 12.5% and then again a rise in 2014 with 7.56% and in 2015
with 10.42%, meanwhile in current liabilities the change was very wide, it was 23% from
2009 to 2010 while declining in the next years i.e. 9.8%, 5.99% and finally -8.65% in 2013.
After 2013, there was a sudden rise in 2014 with 8.81% and 12.085% in 2015 but declined to
1.745% in 2016. This shows that the liquidity position is improving year by year. In debt
percent change was declining while in total change is more in the more current years. Since
the stockholders value went down this implies that there has been either less reliance on the
stockholders to help or that stockholders have sold off their stock and no more help Disney.
Since the economy has been in the decay it is most likely more probable that stockholders
have sold their stock and the Disney Corporation has must be all the more financially
autonomous from their stockholders.

6.3.2 Vertical Analysis

Vertical analysis is a method of financial statement analysis in which each entry for each of
the three major categories of accounts, or assets, liabilities and equities, in a balance sheet is
represented as a proportion of the total account. Vertical analysis is also used across other
financial statements as a percentage measure.

A vertical analysis sheet maps out where their money is coming from and what it is going
into. As per analysis, most of the benefits are made up of property plant and gear. There is a
more stupendous rate of current possessions long haul ventures and different holdings in
latest than previous. However, they decrease property plan & gear, goodwill, and elusive
stakes. As for the liabilities and Stockholders value, there was a drop in long haul obligation
however their different liabilities went up. The stockholders value likewise expanded, as
there must have been a requirement for more money stream and accessible subsidizes in the
year 2008 than previous years.

37
6.4 DuPont Analysis
DuPont analysis is a method of performance measurement that was started by the DuPont
Corporation in the 1920s. With this method, assets are measured at their gross book
value rather than at net book value to produce a higher return on equity (ROE). It is also
known as DuPont identity.

According to DuPont analysis, ROE is affected by three things: operating efficiency, which is
measured by profit margin; asset use efficiency, which is measured by total asset turnover;
and financial leverage, which is measured by the equity multiplier.

Therefore, DuPont analysis is represented in mathematical form by the following calculation:

ROE = Profit Margin Asset Turnover Ratio Equity Multiplier

6.4.1 DuPont Analysis Components

DuPont analysis breaks ROE into its constituent components to determine which of these
components is most responsible for changes in ROE.

1. Net margin: Expressed as a percentage, net margin is the revenue that remains after
subtracting all operating expenses, taxes, interest and preferred stock dividends from a
company's total revenue.
2. Asset turnover ratio: This ratio is an efficiency measurement used to determine how
effectively a company uses its assets to generate revenue. The formula for calculating
asset turnover ratio is total revenue divided by total assets. As a general rule, the
higher the resulting number, the better the company is performing.
3. Equity multiplier: This ratio measures financial leverage. By comparing total assets
to total stockholders' equity, the equity multiplier indicates whether a company
finances the purchase of assets primarily through debt or equity. The higher the equity
multiplier, the more leveraged the company, or the more debt it has in relation to its
total assets.

DuPont analysis involves examining changes in these figures over time and matching them to
corresponding changes in ROE. By doing so, analysts can determine whether operating
efficiency, asset use efficiency or leverage is most responsible for ROE variations.

38
Table 1: Walt Disney and their Competitors

Walt Disney Times Warner Twenty-first Century

Company Inc. Fox
Net Profit Margin 16.88 20.47 10.08
Asset Turnover 0.73 0.11 0.56
Leverage 1.73 2.71 3.54
Return on Equity (ROE) 21.39 6.1 20.17

From the above table, we can conclude the following points:

Walt Disney has a substantial amount of disposable income with a 16.88% Net Profit
Margin but Times Warner leads the chart with 20.47%
Walt Disney is significantly efficient in using its assets to generate revenue with an
Asset Turnover Ratio of 0.73
Walt Disneys Leverage ratio is the lowest at 1.73 which indicates that the company
has to pay low interests because the equity has a low portion of debt

Thus the ROE of Walt Disney Company is most influenced by the Net Profit Margin and its
Asset Turnover which implies that the company is highly efficient is utilizing its equity to get
return when compared to Times Warner Inc. & Twenty-first Century Fox as it has a ROE of
21.39%.

6.5 Porters Five Forces Analysis

6.5.1 Disneys Industry Analysis
Although Disney is involved in many different industries, the industry it belongs to in this
specific case is the film distribution industry. As a first step to evaluating Disneys current
positioning in the industry, we completed the Porters 5 Forces Analysis as shown below:

Power of Buyers: The buyers in the film distribution industry refer to theatres and retailers
that carry films through showings, DVDs, Blu-ray, etc. Although retailers and theatres make
the ultimate decision of which movies they want to purchase, due to the distributors size,
brand recognition, high customer loyalty, and bargaining power for retailers and theatres are
moderate. Customers willingness to spend on movies and merchandise is high, which also
works in favor for distributors in terms of bargaining power.
Power of Suppliers: The suppliers in this case are film creators hoping to distribute films.
The bargaining power is low since they require a lot of capital support from distributors.

39
Also, marketing and distribution are essential for the success of a film, so gaining support and
partnership from large distributors are very important to film creators.

Threat of New Entries: In the film distribution industry, threat of new entries is low due to
the high entry barriers. Currently, there are few big players that dominate the industry,
making it difficult for new start-up companies to match existing companies in size and
success. Film distribution requires high capital investments, which makes it hard for anyone
to enter. Also, success in this industry depends on the number of distribution channels and
partnerships, which is much easier for bigger and well-established brands.

Threat of Substitutes: Substitutes to the film distribution industry are other channels of
entertainment, including television, theatre, and YouTube, to name a few. Although these
channels are growing in popularity, they are not strong enough to match and compete with the
current success and popularity of movies in our society. Film distributors, such as Disney,
also carry a wide fan-base and strong brand recognition, meaning customers are willing to go
out of their way to see a movie distributed by these companies.

Rivalry: A few big players in the industry currently dominate the market for film
distributors. This makes competition fierce, as many of these large firms share similar market
share. There is a tendency for firms to acquire other studios in order to reduce competitive
pressure. Each distributor wants to partner with the best filmmakers, making it a blood battle
between big players to get their hands on the next top film.

6.5.2 Pixars Industry Analysis

In this case, Pixar lies in the filmmaker industry, making it a supplier for Disneys
distribution channels. In order to analyze Pixars current positioning in its industry, we also
conducted a Porters 5 Forces Analysis for this industry.

Power of Buyers: Buyers for the filmmaker industry refer to movie distributors such as
Disney. For this industry, the bargaining power of buyers is high due to the high number of
movies available for distributors to choose from. Since distribution and marketing is critical
for a films success, all filmmakers in the industry hope to partner up with strong distributors
to get their films out in the market. There is zero switching cost for buyers, as distributors can
choose among filmmakers and movies to partner with at their leisure.

40
 Power of Suppliers: Suppliers in the filmmaker industry refer to resources needed to create
a film. This might include technology suppliers, equipment manufacturers, and artistic talent.
The shift from hand drawing to CG/outsourcing increases the suppliers needed. However,
Bargaining power for these suppliers are moderate in that although it is important and
sometimes difficult to recruit the best resources, there are many options available for
filmmakers to choose from.

Threat of New Entries: Due to the growth of access to technology, threat of new entries is
high since barriers to entry are lowering. Numerous start-up companies are beginning to enter
the industry, bringing fresh talent and new ideas to the game. They are each introducing
creative storylines and lovable characters with hopes to becoming the next Pixar, which is
potentially threatening to all players in the industry, including big and well-established firms
.
Threat of Substitutes: Substitutes for animation filmmakers includes other types of films
such as comedy, action, etc. Although the other types of movies are popular and classic,
animated films are extremely popular among children and adults alike. The lovable,
relatable characters from CG feature films tend to create a large buzz and fan bases around
the world. For this reason, threat of substitutes is considered moderate in this industry.

Rivalry: Rivalry for this industry is high due to the large amount of competition coming
from both start-up companies as well as larger, well-established entities. As access to
technology grew, more startup companies joined the industry with hopes of becoming the
next Pixar. At the same time, there are many other big players in the industry, such as
DreamWorks and Katzenbergs Studio, to name a few. With competition coming from both
sides of the spectrum, rivalry is high and growing.

6.6 Conclusion
After careful consideration, the final decision that we recommend for Disney is to go ahead
with the full-on acquisition of Pixar. We believe that this is the best option considering the
amount of value and talent that Pixar would bring into the firm as the leader in the computer
generated animation industry. Considering the amount of success that previous collaborations
brought, it is easy to see that the relationship with Pixar is a valuable resource that Disney
should not risk damaging. Through the merge, Disney would receive access to Pixars top of

41
the line technologic capabilities and talented human resource, while Pixar would benefit from
Disneys access to funding, vast distribution channels, and capabilities to produce
merchandise. The other options previously mentioned each contains important flaws, and
would not allow Disney and Pixar to fully exploit their synergies while bringing potential
threat to Disney in the case that Pixar partners with a competitor.
Aside from the acquisition, we also recommend for Disney to extend a generous offer to
Steve Jobs in order to keep him happy as the would-be majority shareholder of Disney, and to
keep Pixar employees satisfied and engaged. This could be achieved by ensuring that Pixar
and Disney remain two separate entities in terms of organizational structure, protecting the
individuality of Pixar artists and maintaining the valuable culture that made Pixar what it is
today.

42
CHAPTER 7

CONCLUSION

43
Walt Disney is a company that never afraid of dreaming big, it is currently participating in the
multiple business ventures both in media industry and technology, and also operating in some
other business projects. Growth of Disney might be a result of the demand of consumer and
the success story of the company started from a small cartoon to a multi-billion dollars
international business. Disney is now strengthening its presence in many markets e.g.
children films and TV shows, theme parks, digital media and live productions. US children
TV ratings show that Disney is crossing its heights day by day, it is evident that 7 of the
Disneys channels are rated in the top 20 most children TV programs in US. Although the
universal entertainment symbol the Walt Disney is normally taken as a stable and growing
firm but the company is less stable with respect to cash flows, profit margins and the return
on investments. This kind of discrepancies might be a result of one or more aspects of
business, but the company is still creating opportunities for the people who are willing to
invest.
The merger between the Walt Disney Company and Pixar was largely successful. Disney
acquiring Pixar has majorly benefitted their animation studios by bringing innovative ideas
and technologies to Disney themed movies. It combined two of the most successful animation
companies in the business, and solidified an already existing partnership.

Although the blending the two different corporate cultures has been a hard transition, Disney
Pixar will undoubtedly work through these issues in order to continue their success. Nothing
extraordinary happens overnight. Disney Pixar will eventually establish a workable vision for
their company that encompasses the best characteristics and qualities of the individual
companies.

44
CHAPTER 8

SUGGESTIONS

45
The current situation that Disney faces is very unique. Considering its relationship with
Pixar, Disney holds a powerful set of options to choose from. Considering the pros and cons
of options we introduced previously, we recommend going with the full acquisition of Pixar.
While it is recommended for Disney to acquire Pixar, the merger should be done in a way that
ensures a positive, sustainable relationship that maintains diversity. Through the acquisition,
Disney can exclusively hold onto the talent that Pixar cultivates. Pixar and Disney both bring
a value of fan base and name recognition, which can be powerful when combined. Most
importantly, Disney will have control of the revenue stream for both organizations, which
will prevent any polarizing negotiations, as both will be under the same roof. Each employee
of both sides will consider themselves citizens of Disney, increasing cohesiveness in the firm.

Although the two organizations would be under the same roof, they should still maintain
independence in terms of structure, while being collaborative in the creative process. It is also
important to mutually mention both names in all collaborative films, so audience and fans of
either company can be attracted to the films.

When negotiating the deal with Steve Jobs, Disney should be generous in the offer it extends.
If they hope to maintain a great relationship with the organization they are buying, Disney
must make sure Pixar is happy with the deal. The key target of the negotiations is Steve Jobs,
as he is the would-be majority shareholder for Disney. Disney can offer him leadership in the
creative department, and exclusive deals with Apple ITunes to bring additional benefits.

Overall, we believe that acquisition is a great decision for Disney at this point. Combined,
Pixar and Disney bring a powerful arrangement of tools and resources. To ensure a
sustainable competitive advantage, we recommend acquisition over all other alternatives.

46
CHAPTER 9

REFERENCES AND
BIBLIOGRAPHY

47
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The "Next Phase" of Strategic Acquisition by Joseph Calandro Jr.
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Mergers and Acquisitions: A Conceptual Review by Muhammad Faizan Malik
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