Why has Disney become an acquisition target




MBS “ Applied Corporate Strategy




Part 1 (30%):

Objective: Pick an organisation of your choice and describe, using a model/theory that we studied in class, the corporate culture that exists at that company.

Can You Say What your Strategy is ?( Article of Swedish Furniture Company Ikea’s Strategy)



Assignment is to be no more than One page in length, font size 12.


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Part 2 “ Article (30%):


Almost 1500 CEOs quit or were fired last year in the US “ about 6 per day on average, therefore you have to have a succession plan in place. Drawing on the articles reviewed in class, expand on what a company can do to in relation to replacing a CEO.


Assignment is to be no more than One page in length, font size 12.



Part 3 “ Case Study “ 40% “ (Written part 20%, Presentation part 20%):

Disney “ the battle for the Magic Kingdom


Case Study Questions:


1. Why has Disney become an acquisition target?

2. What strategies would an acquirer pursue in order to restore profitability to Disney?

3. œIn reality acquisitions are an uncertain strategy. Why do you think that so many acquisitions fail?



Presentation Details:

The answers to the above questions will be presented by the student at the end of the second week of exams

Case study details:

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All assignment questions carry equal marks

Line spacing: 1.5 spacing

Font: Times New Roman point 12

Word limit for document: Maximum 1500 words (not including bibliography)

Part 3 “ Case Study (40% in total)


Disney “ the battle for the Magic Kingdom


The case is set in February 2004.


Comcast, America’s biggest cable company, has launched an audacious bid for Disney. The timing is shrewd, for Michael Eisner, Disney’s boss, is under attack for poor governance and disappointing results.


Comcast is taking advantage of a particularly weak point in Disney’s history. Last month Disney’s most important business partner, Pixar, an animation studio, abandoned it. At the end of the last year, two board members, Roy Disney and Stanley Gold, resigned and started a campaign to oust Michael Eisner, Disney’s boss. On the day that Comcast announced its bid, Disney’s executives started an investor conference in Florida, an occasion they had counted on to boost the company and its share price. The share price did indeed jump, but this was thanks to Comcast’s bid, initially worth $66 billion, rather than to any of Disney’s business plans.


At its get-together with investors, the Disney high command behaved as if the Comcast bid had never happened. Indeed, the bidder’s name was barely mentioned, until Mr Eisner joked that ˜we’re buying Comcast’ when asked about possible acquisitions. The Disney boss also argued against the sort of consolidation that media distributors like Comcast have pursued. Mr. Eisner said ˜Concentration of distribution usually hurts the small guy (not) the large player’.

Mr Eisner’s dismissal of Comcast’s approach was backed up by Disney’s board, which formally rejected the hostile bid on Monday Feb 16th and expressed confidence in Mr Eisner’s leadership. However, the board also said it would ˜consider any legitimate proposal’. The problem was that Comcast’s all share bid, which by then had fallen in value to $60 billion, did not ˜reflect fully Disney’s intrinsic value and earnings prospects’.

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Mr. Eisner’s rejection of merger talks was ˜unfortunate’, Comcast argued in a letter to him, because strategically the deal makes sense. Putting Comcast, which has 21m cable subscribers, together with Disney, wrote Brian Roberts, president and chief executive of Comcast, would unite its distribution power and technology know-how with Disney’s peerless content business. Although the jury remains out on whether vertical integration really delivers value, other companies have already pursued such a strategy. Rupert Murdoch’s News Corp, for instance, has satellite distribution plus its Fox content businesses. Time Warner unites cable with a firm studio and television programming “ as well as, thanks to its horribly bubbly merger with AOL in January 2000, the internet. But a merger between Comcast and Disney would create by far the biggest vertically integrated entertainment giant of them all, with a market capitalisation of over $120 billion, says Comcast, compared with Time Warner’s current $78 billion. There are no obvious competition grounds for blockingthe proposed deal, since Comcast and Disney mostly operate in different businesses. However, the sheer size of the  proposed company has prompted regulators and politicians to insist that they will scrutinise it aggressively.


Weapons of mouse destruction

Beyond grand strategic dreams “ which some observers reckon that the hard nosed sorts who run Comcast cannot really take seriously “ Disney’s appeal may be that its assets are undervalued, while those of Comcast are arguably overvalued. Disney’s crown jewel, for e.g. is ESPN, America’s most watched sports network. Comcast is particularly keen to own ESPN, as it currently has to pay high and rapidly rising fees to carry it on its cable channels.

Under Disney’s current management, the group’s profits are now at their lower than they were in 1988 and its share price is at the level it was in 1997. Part of the reason for the poor performance is sheer bad luck; Disney’s theme parks, which make up nearly a quarter of its revenue, suffered badly in the wake of the terrorist attacks of Sept 11th 2001 and because of the subsequent economic weakness “ they are recovering now, if slowly. A more intractable problem is the broadcast network, ABC, which Disney bought in 1995 and is still losing money. With some exceptions, Disney’s movie making has struggled for ages. It has had big hits, such as ˜Finding Nemo’ last year, which have propelled a significantimprovement in financial performance, but these triumphs have mostly been the work of Pixar, the studio which is now divorcing Disney.


Would Concast, a family controlled firm with few creative credentials, be any better at managing Disney’s assets? Possibly. Comcast management described its plans to improve profits at its target, with special focus on ABC, and who is now Comcast Cable’s president, also stressed the need to revitalise Disney’s animation business, which has languished of late. In addition to improved profitability, Comcast said, cost savings could be $300 -$500 m a year, bringing a total cash flow boost from the merger of as much as $1 billion annually.

Comcast, which has a well deserved reputation as a tough negotiator of deals, also has a fine record in arguably an even harder part of the merger process “ execution. It bought AT&T Broadband, a company twice its size, 15 months ago, and so far the acquisition is working well “ Comcast has managed to slow dramatically the number of cable subscribers being lost by AT&T Broadband. Indeed, Comcast is considered to be America’s best run cable operator. It has managed “ thanks, again, to those negotiating skills “ to get cheap programming without ruining relations with its content providers.

In 2000, for instance, a war broke out between Time Warner and Disney over the cost of Disney’s cable channels and ended up with Time Warner blocking ABC from transmission. Comcast, meanwhile, had the same fight with Disney, but carried it out in secret, winning what are believed to have been favourable terms.

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Above all, Comcast appear to believe that most of Disney’s long term problems have one (easily removed) root cause: Mr. Eisner, chairman and chief executive of Disney since 1984. In his first 13 years in charge he impressively raised revenues  from $1.65 to $22 billion, and market value from $2 to $67 billion. But he lost his way some years ago, and the swelling crowd of influential critics of Mr. Eisner has surely embolded Comcast to make its bid hostile.

Mr. Eisner seems to have trouble getting on with people and thereby retaining senior talent. A long list of executives, such as Paul Pressler and Steven Bornstein, have left Disney. Mr Eisner seems to have made insufficient effort to keep up good relations with Steve Jobs, chief executive of Pixar, which has been responsible for over half of Disney’s studio profits in recent years. Mr Eisner has infuriated Mr Jobs so much so that recently Mr Jobs unexpectedly ended talks to renegotiate Pixar’s coproduction deal with Disney.

Mr Jobs noted that Mr Eisner told Disney’s board that, after seeing an ealy cut of ˜Finding Nemo’ he didn’t think the film was as good as its others “ an embarrassing incident since it went on to become the highest grossing animated feature film of all time. On another occasion, Mr Eisner called Mr Jobs a ˜Shiite’ in a Disney board meeting.

Losing Pixar should not immediately hurt Disney’s results because the contract between the two firms obliges Pixar to deliver 2 or more films, in 2004 and 2005. Wall Street analysts have thus been fairly upbeat about Disney’s shares, even before the bid “ the success of ˜Finding Nemo’ and a cyclical recovery in advertising and visitors to theme parks should boost profits sharply in 2004. Also, Disney has the rights to make sequels to all the films it cofinanced with Pixar, a thought that Mr Jobs said makes his executives ˜sick’ since they will have no control over creative quality.

In the longer term, however, Disney faces a huge problem if it cannot improve the quality of its animated films. Mr Jobs cruelly pointed out last week that not even Disney’s marketing and brand could turn Disney’s latest two home grown animated films “ ˜Treasure Planet’ and ˜Brother Bear’ “ into success: they both ˜bombed at the box office’.

Unhappy family

Roy Disney and Stanley Gold, 2 former board members resigned their positions in December in order to mount a public campaign against Mr Eisner. Mr Disney, the nephew of Walt, is derided by some Disney allies as a ˜nut’. But the support of Mr Gold “ a shrewd, tough lawyer who put Mr Eisner in his job in the first place “ has been helping to create a following among some institutional investors for his ˜Save Disney’ internet campaign.

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Whilst Messrs Disney and Gold clearly regard Comcast’s bid as vindication for their campaign, they are as yet certain about whether to support the takeover. Perhaps they would prefer Mr Eisner simply to go, so that the firm can remain independent, or (less attractive) a ˜white knight’ to acquire Disney. Indeed, Comcast’s offer may yet trigger either of

those outcomes.


Whether any plausible white knight would be a more attractive partner than Comcast is debatable; indeed, it is easy to imagine blacker knights now joining the tournament to win Disney. True, Mr Murdoch has ruled out bidding for Disney.

But Viacom, Liberty Media and even Microsoft may fancy the firm. Even likelier bidders are 2 internet firms, Yahoo and InterActiveCorp, whose respective bosses, Terry Semel and Barry Diller, hail from the entertainment world.


Mr Eisner, one of the entertainment world’s great survivors, will no doubt try to fight to the death. He may offer yet more corporate reforms “ though the eary ones are mostly done. He will point out that Comcast’s opening offer, originally worth $27 a share and falling, is low “ though Comcast has surely known all along that it will have to raise its offer closer to the $35 that Lawrence Haverty of State Street Research says would tempt institutional investors. The fact is, if Disney’s board really wants to keep one of the world’s iconic companies independent, its best strategy may be to replace  Mr Eisner forthwith. Otherwise, Comcast will soon be doing it instead.


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