M&A Deals as an Instrument that Ensures Global Competitiveness. The Example of Disney Media Conglomerate

Each M&A deal concluded by The Walt Disney Company brought it not only higher revenues and higher demand but also some other unique benefits such as rights to use characters and themes of acquired companies, advanced technologies, new ideas and reduced competition. Thereby, TWDC increased differentiation level which brought it opportunities to branch off in areas where it hadn't previously had the capability to do so, higher significance among competitors and access to new markets both domestically and internationally. All these factors are moving the company to the new level of doing business. First of all, M&A deals helped the company to get more competitive advantages and to get more power in the market. Secondly, these transactions increased the number of admirers of TWDC and brought it even more fame than it had.

According to the Forbes List in 2015 The Walt Disney Company is #84 in “Global 200” list, #14 in “World's Most Valuable Brands” list, #33 in “Market Value” http://www.forbes.com/companies/walt-disney/ list and got the 2^nd place in “Global 2000” list among the companies in Broadcasting and Cable Industry after the Comcast (#46) http://www.forbes.com/global2000/list/#industry:Broadcasting%20%26%20Cable .

The contribution of each M&A deal in the global competitiveness of The Walt Disney Company can be evaluated by the criteria listed in Table 1.

Table 1. The Features of M&A deals that Influenced the Global Competitiveness of TWDC

Before TWDC acquired Pixar in early 2006 its market capitalization was 52.8 billion US dollars (2005). However a year after the acquisition, at the end of 2006, the market capitalization increased and was 61.02 billion US dollars. Afterwards in 2008 the company lost its position (-56%) mostly because of Global Financial Crisis, however, it made a decision to buy another company (Marvel Entertainment, LLC) in December, 2009. Since then its market capitalization grew nearly twice from 34,79 billion USD (2009) to 61,00 billion USD (2010). That means that the company's size, as opposed to sales or total asset figures grew significantly. Acquiring Marvel was one of the leading factors that helped TWDC to get back and even overcome the pre-crisis market capitalization level. In October, 2012 when the company acquired Lucasfilm it managed to move forward even more: from 71 billion USD in 2012 to 94,71 billion USD in 2013 (25% growth). Today TWDC holds the first place according to its market capitalization (125,77 billion USD) in the entertainment segment http://financials.morningstar.com/competitors/industry-peer.action?t=DIS . From Table 2 it can be seen that after each purchase the market share of TWDC grew except the time of Global Financial Crisis (2008-2009). The price of TWDC's shares grew four times since 2005 (from 27,85 USD as to 3 January, 2005 to 109,24 USD as to 12 May, 2015).

Table 2. Market Capitalization of TWDC (in bil. USD), 2005-2014

Chart 1. Market Capitalization of TWDC (in bil. USD), 2005-2014

When talking about the revenues, The Walt Disney Company managed to increase its total revenue by 34,56% after the first acquisition in 2006 (2005 - 31,944 million US dollars, 2014 - 48,813 million US dollars). The largest revenue increase is seen after the Lucasfilm purchase in 2012 (6,14% growth) while the revenues growth after Pixar and Marvel acquisition were 3,05% and 5,03% correspondingly. The financial crisis in 2008-2009 badly influenced the company's revenue and net profit. So, it is difficult to estimate whether Marvel acquisition was successful in terms of revenue increase or not. However, since TWDC develops its business in different segments it faces less risk because of an economic or competitive factor that lowers the revenue for a single segment and results in more chances to expand in multiple markets. Today, after the last M&A deal TWDC's revenue continues to grow and that is why it can be assumed that mergers and acquisitions have a positive impact on the company's activity, giving it the opportunity to benefit from diversification and synergy.

Table 3. Revenue and Net Income of TWDC (in bil. USD), 2005-2014 The Walt Disney Company Annual Reports 2005-2014

Chart 2. Revenue and Net Income of TWDC (in bil. USD), 2005-2014

The Walt Disney Company offers a wide range of goods and services for all tastes, cultures and ages: movies, shows, themes parks, radio stations and consumer products. TWDC makes its products really differentiated within its company and from products from acquired companies.

Pixar acquisition had a great impact on TWDC's diversification. One of the main inputs of Pixar Entertainment in TWDC is its technologies. Traditionally Disney used to apply hand-drawn animation which was no longer successful. However, Pixar was involved in developing digital animation technology, including 3D film production. The former, sensitively feeling the market situation, offers modern stories and mobile heroes organically performing in 3D format. Despite shortage of kindness, touching, charm and romanticism Pixar characters win the hearts of the audience by their energy and simplicity.

Another important benefit is synergy. Pixar was always a strong competitor and merging with TWDC was advantageous to the both companies. First of all, while combining their technologies and ideas companies can achieve more success in the entertainment market. Their mutual popularity grew and finally the revenues increased. The Pixar now has the access to the Disney's production facilities and Disney can use Pixar characters in its merchandize and Disneyland parks attractions.

When TWDC acquired Marvel Entertainment, Robert Iger stated that “Marvel has done a good job of understanding its characters and story lines. What was attractive to us about this deal was that it was about acquiring writers who know these characters and story lines well”Publishers Weakly: http://www.publishersweekly.com/pw/by-topic/new-titles/adult-announcements/article/3290-breaking-down-disney-s-acquisition-of-marvel.html . Moreover, The Walt Disney Company got interested in Marvel not only because of the great number of potentially profitable heroes but also because Disney had practically no production focused on boys before: the company had much more princesses and beauties it in its theme parks, TV channel, cruise lines, and merchandising segments. Marvel Comics characters are now a key element in theme parks revenue. Also Marvel brands provided the company with significant long-term growth and value creation.

The successful acquisitions of Pixar Animation Studios and Marvel Entertainment have proven the company's ability to nurture strong brands and add their creative content to its potential and value. These acquisitions have boosted company's growth opportunities and increased diversification even more than it used to be. With Marvel, the company can produce movies with new characters that did not belong to Disney before (Iron Man, Thor, Captain America, etc.); with Pixar, Disney can take advantage of technological innovations and creativity in the animation world, which have been helping it to improve the quality of recent animated films released by the company. Undoubtedly, these acquisitions will continue to pay off for Disney in the foreseeable future.

Acquiring Lucasfilm gave TWDC the first-class portfolio of content including one of the greatest family franchises "Star wars” that will be combined with the unique and unsurpassed creative ideas of Disney. This transaction will provide the stable growth and considerable profit for many years.

When TWDC was buying Lucasfilm it set the price as 4,1 billion US dollars. The fact that the goodwill was estimated as practically half of the deal price (2,6 billion US dollars) means that Disney highly appreciates the value that will be added to the company afterwards from leveraging Lucasfilm intellectual property across TWDC's distribution channels.

Moreover, Lucasfilm includes Industrial Light & Magic and Skywalker Sound, which provide visual and audio effects and other post-production services to the Company and third-party producers. The new added company's brand was included primarily in Disney's Studio Entertainment and Consumer Products segments increasing the level of diversification of products, services, audience and business in a whole.

Together Disney's M&A deals with Pixar, Marvel and Lucasfilm gave the company great portfolios of content, new ideas, advanced technologies, audience and brought some incredibly innovative storytellers to Disney, who managed to expand the company's creativity in new directions.

Moreover, the acquisitions of Pixar, Marvel and Lucasfilm gave The Walt Disney Company not only higher profits and product diversification but also a skillful management team such as Steve Jobes, who was a large shareholder and one of the Directors of TWDC, Ike Perlmutter, who remained the CEO of Marvel Entertainment, George Lucas, creative consultant of "Star Wars" film and Cathleen Kennedy, the president of Lucasfilm and brand manager and executive producer of the future "Star Wars" film. All these people contributed to the new experience for The Walt Disney Company and better integration of the acquired companies.

Thus, The Walt Disney Company reached high level of success by focusing on three strategic leverages that open the limitless potential of the company: creativity, innovative technology and global expansion. Since launching this strategy, The Walt Disney Company has delivered some of the world's most extraordinary entertainment experiences as well as significant growth and a total shareholder return of 317%.

3.  M&A Deal as an Instrument that Increases Disney's Global Competitiveness

3.1 Influence of M&A Transactions on The Walt Disney's Company's Business Segments

Every year the TWDC becomes stronger in the world entertainment market. Today, the company occupies one of the leading positions in this branch. The main competitors in its various segments include such media conglomerates as Viacom Inc., Time Warner Inc., Twenty-First Century Fox, CBS, Directiv Group, Inc. and Comcast.

In many respects the success of The Walt Disney Company in the market is achieved due to the chosen strategy of merges and acquisitions. It is said that Pixar, Marvel, and Lucasfilm acquisitions have “proven the company's unique ability to nurture strong brands and expand creative content to its fullest potential and maximum value” The Walt Disney Company Annual Report, 2012. Thus, it is possible to draw a conclusion that M&As increased Disney's global competitiveness both in entertainment market and in all its separate operating segments.

As it was already mentioned in Analytical part of the paper, the company carries out its activity in five segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive Media. Each of these segments is very important for the company and makes its business more diversified for Disney's customers. Having considered each segment in particular, namely its contribution to TWDC's activity, we will be able to define how M&A deals affected these segments. Also it will help us to reveal the weakest segment, which can be strengthened using this type of transactions.

Media networks

Media Networks stands out as the largest driver of TWDC's performance each year. Since 2005 the revenues in this segment grew 38% and the operating income increased 62%. In 2014 revenues reflected 4% growth in comparison to the previous year. All these changes were caused to a high extent due to the inclusion of Pixar, Marvel and Lucasfilm to The Walt Disney Company business.

Table 4. Revenues and Operating Income of TWDC by Media Network Segment The Walt Disney Company Annual Reports 2005-2014 (in bil. USD)

Parks and Resorts segment play a crucial role in raising strategic awareness for Disney's brands and fully engage the audience around the world.

In this segment TWDC has ten large competitors worldwide. The strongest among them are - Merlin Entertainments Group in United Kingdom (15%), Universal Parks and Resorts (9,6%), OCT Parks China (6,9%) and Six Flags Entertainment Corp (6,9%). However, Disney's Parks and Resorts remain the leader in this segment with 35% market share http://en.wikipedia.org/wiki/List_of_amusement_park_rankings .

Table 5. Revenues and Operating Income of TWDC by Parks and Resorts Segment The Walt Disney Company Annual Reports 2005-2014 (in bil. USD)

The Studio Entertainment segment remains the main and the leading part of TWDC business though it is not that profitable as Media Network segment. It provides vivid and happy ending stories, memorable characters and remarkable worlds that make Disney one of the best-known hallmarks in the world.

In 2013 The Walt Disney Animation Studios reclaimed its rightful place among the world's best studios in animation, thanks to the continuing creative resurgence that began with the acquisition of Pixar. The creative lift brought by Pixar is evident not just at the Disney Animation Studios, but also at Consumer Products and at Parks & Resorts, where Disney's characters and stories can be experienced in new and innovative ways. Pixar illustrates the level of commitment to quality and creativity The Walt Disney Company strives for The Walt Disney Company Annual Reports 2007. Moreover, Lucasfilm results are included primarily in Studio Entertainment and Consumer Products segments.

Table 6. Revenues and Operating Income of TWDC by Studio Entertainment Segment The Walt Disney Company Annual Reports 2005-2014 (in bil. USD)

Disney Consumer Products segment plays a vital role in the company's global growth. This segment leverages the company's high-quality content, builds powerful franchises and boosts Disney's influence in markets around the world.

TWDC markets Disney, Pixar, Marvel and Lucasfilm themed products through retail stores operated under the Disney Store name and through internet sites DisneyStore.com, MarvelStore.com in North America (214 stores), Western Europe (88 stores) and Japan(46 stores). For example, Marvel Publishing creates and publishes comic books and graphic novel collections of comic books in print and digital formats. Marvel Publishing also licenses the right to publish translated versions of these comic books, mostly in Europe and Latin America.

Fueled by the enormous creativity of Disney, Pixar, Marvel and Lucasfilm, during 2014 Disney Stores delivered their best performance to date. Disney Consumer Products delivered revenues of nearly 4 billion USD and operating income of more than 1,3 billion USD.

Table 7. Revenues and Operating Income of TWDC by Consumer Products Segment The Walt Disney Company Annual Reports 2005-2014 (in bil. USD)

Interactive segment is the youngest among TWDC's segments. It started its operation in 2008 after the merger of Disney Interactive Studios and the Walt Disney Internet into a single business unit which is called Disney Interactive Media Group. Disney heads believe that video gaming is a key growth opportunity over the next five to seven years as it allows extending the existing characters and brands and delivering stronger returns from the key franchises The Walt Disney Company Annual Reports 2007.

The increase in game sales and subscriptions revenue was driven by an increase of 25% from higher self-published console game revenues due to the fourth quarter release of Disney Infinity (new video game platform) and 7% due to the inclusion of Lucasfilm's interactive games business http://finance.yahoo.com/news/guide-disney-consumer-products-interactive-170009240.html .

Table 8. Revenues and Operating Income of TWDC by Interactive Media Segment The Walt Disney Company Annual Reports 2005-2014 (in bil. USD)

Nintendo Co., Ltd is a Japanese company, established in September 1889. It specializes in creating video games and game consoles http://www.nintendo.com/corp/history.jsp . The main advantages of the company are: recognition and popularity of the brand, diversified products, innovative and easy-to-use products as well as low production costs, which allows the company to attract consumers from all the economic classes.

The most famous console by Nintendo are - Game Boy, Super Nintendo, Game Boy Color, Nintendo DS, Game Boy Micro, Wii, Nintendo 3DS, Wii mini and Nintendo 2DS. Among the most famous and beloved gamed produced by Nintendo are - Super Mario, Sonic, Rayman, Warms and many others.

If Disney acquires this company, it will be able to work in a new niche: games on game consoles. As Disney already produces games for game consoles it will be able to sell both complement products, and thus increase brand awareness and also receive additional income from the sale of these consoles.

Electronic Arts, Inc. is an American corporation that distributes video games. The company was founded in May 1982 and became one of the first companies in the gaming industry http://www.ea.com/ru/1/about-ea . The main benefit of Electronic Arts company is the extensive content library which gives enormous power to the holder of that content. The company can demand royalty payments for any use of that content.

Currently, the most successful products are sports games published under the label of EA Sports, games based on popular movie licenses, such as Harry Potter and the series of games such as Need for Speed, FIFA, Medal of Honor, The Sims, Battlefield and the later games: Burnout and a series of Command & Conquer.

Another advantage of the Electronic Arts are its subsidiaries, which are quite large companies with a substantional weight on the video game market: BioWare, Criterion Games, EA Canada, EA Digital Illusions CE, EA Montreal, EA Tiburon, Ghost Games, PopCap Games, The Sims Studio and Visceral Games.

Activision Blizzard, Inc. - is the world's largest interactive gaming company that successfully combines media, technology, and entertainment. It was launched after the merger of Activisation and Vivendi Games in December 2007. However, in October 2013 Activision Blizzard repurchased its own shares and got a controlling stake, while the French company Vivendi retained only 83 million units of securities (12%) http://www.activisionblizzard.com/about-us .

The most remarkable games made by Activision Bizzard are - Guitar Hero, Call of Duty, Skylanders, Destiny, World of Warcraft, StarCraft, Diablo and Hearthstone.

The main benefits that Activision Blizzard, Inc. will bring to the Walt Disney Company are the following: highly focused approach (“strive to do a just a few things, but do them exceptionally well” http://www.activisionblizzard.com/about-us ). Moreover, the company claims that everything they do has the potential to be a “breakthrough entertainment experience”. They focus on every piece of capital, talent, innovation, and energy on executing with the highest degree of excellence. The company's specialty is online multiplayer games. In fact, six times in the past ten yaers, Activision Blizzard has created the biggest game of the year and that fact means a lot when valuing the potential acquired companies input.

Microsoft Corporation http://news.microsoft.com/facts-about-microsoft/ is one of the largest multinational companies producing software for all kinds of computers - personal computers, game consoles, PDAs, mobile phones etc.. It is the developer of the most widely used software platform - Windows operating systems. Microsoft operates its business in five segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division.

However, the gaming unit (Entertainment and Devices Division) occupies only one-fifth of the entire company and Microsoft will definitely not sell it to Disney as this business segment is becoming more and more popular and profitable today. Therefore, we assume that despite the fact that, for example, Activision Bizzard, Electrinic Arts and Nintendo have almost the same market share, Microsoft is a huge corporation that mostly deals with software, which is not part of Disney's interests. Our primary goal is to improve the position of Disney's Interactive Media segment in order to improve the position of TWDC in a whole and thereby to improve its global competitiveness. Therefore, we assume that Microsoft can be excluded from the list of possible candidates for takeover by Disney.

2. Financial performance of target companies

At this stage, in order to create a shorter list of desired companies, we will analyze financial data of these companies such as net income, revenues, assets, liabilities and others. On this basis it will be possible to define company (ies), which definitely do not meet Disney's requirements.

Table 9. Selected Financial Data of Activision Blizzard, Inc. http://financials.morningstar.com/balance-sheet/bs.html?t=ATVI&region=usa&culture=en-US

http://financials.morningstar.com/income-statement/is.html?t=ATVI&region=usa&culture=en-US (in bil. USD)