Acquisition of Disney and Pixar (Research Paper Sample)

MULTINATIONAL ACQUISITION
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Multinational Acquisition
Executive Summary
The acquisition of Pixar by Disney is deemed to be one of the easiest and well undertaken mergers and acquisition transactions in the history of mergers and acquisitions. This is for the reason that both parties were in consent the whole time. Affiliations between Walt Disney and Pixar began a long time ago in the year 1991 when both institutions accepted a Feature Film Agreement. The accounting method employed in reporting this financial transaction was the Generally Accepted Accounting Standards (GAAP). This method is different from International Financial Reporting Standards (IFRS). If the latter was employed several differences would have occurred such as the reporting of intangible assets and also a difference in the aspect of inventory costs. The use of the two different methods of accounting implies that there are differences between the financial statements reporting between the two accounting standards. However, it can be argued that this does not amount to material amounts variances in the financial statement.
Introduction
The acquisition of Pixar by Disney is deemed to be one of the easiest and well undertaken mergers and acquisition transactions in the history of mergers and acquisitions. This is for the reason that both parties were in consent the whole time. Affiliations between Walt Disney and Pixar began a long time ago in the year 1991 when both institutions accepted a Feature Film Agreement. In this arrangement, Pixar would be fixated on the developing and production of three computerized animated films. On the other hand, Disney would be accountable for the marketing as well as the distribution of the films. In the outset of 2006, Disney came to an agreement for the acquisition of Pixar (New York Times & The Associated Press, 2006). The business combination of Disney acquiring Pixar was reasonably and somewhat upfront. Disney accepted to convert each share of Pixar into 2.3 shares of Disney and therefore this was a complete 100% equity acquisition as it purchased all of the shares and made it a wholly-owned subsidiary (Monica, 2006). So as to see the transaction go through, Disney was forced to issues 279 million new ordinary shares. Nevertheless, so as not to create a dilution for the exercising stockholders, Disney subscribed back 225 million ordinary shares in the exchange market. As a result the real effect on the statement of financial position of Disney could be perceived as compensated in cash for 80% of the transaction, and allocating the outstanding 20% of the assets with Pixar stockholders. The stock price that was fixed by Disney amounted to $7.4 billion (BBC News, 2006). In this deal, Pixar was given $1.1 billion in cash and its equivalents. Therefore effectually, Disney paid out $6.3billion dollars for Pixar. At the time of the acquisition publication or broadcast, the stock price of Disney was $25.52 for every share while that of Pixar was $57.50 for every share (Munganest, 2006). The precise amount of Pixar´s ordinary shares for the transaction was a mean price in the market for five successive days, culminating at two days prior to the information of the acquisition being declared. Steve Jobs who is the founder of Pixar was the highest shareholder with 50.6% of the shares in Pixar. Once the transaction was complete, Steve Jobs became the biggest individual stockholder of Disney with 7% (Holson, 2006).
Accounting Requirements for the Business Combination and Challenges in preparing Financial Statements for Consolidation
The accounting requirements for the business combination were based on the accounting principles widely accepted in the United States. Disney accounted for the business transaction by making use of the purchase method of accounting that is employed for business transactions. In this accounting method, Disney was required to take record of the market value of its ordinary shares in association with the acquisition, the fair value of its options traded for unpaid vested options to buy shares of Pixar ordinary shares anticipated in association with the acquisition and the total amount of transaction expenses directly associated with the acquisition as the valued purchase price of purchasing Pixar. Recording of the market value of the ordinary shares was on the basis of the average of the closing share prices of the Disney ordinary shares for a range of five days on the trade exchange starting two days before and culminating two days after the date of the publication of the acquisition which was in January 2006 (SEC, 2006).
Some of the challenges in the preparation of the financial statements for consolidation of subsidiaries on the date of the acquisition included adjusting the estimated purchasing price to encompass the impact of resolving the prevailing predetermined and prescribed agreement between Disney and Pixar by taking record of the dissimilarity between the worth value of the predetermined and prescribed terms and current market values for comparable and parallel agreements as a profit or loss at the date of the acquisition. More so, this is a mandatory accounting requirement in one of the emerging issues which is “Accounting for Pre-existing Relationships between the Parties to a Business Combination”. This implied that Disney was obligated to apportion the projected and valued purchase price at the date of the acquisition of Pixar and record any amount that is excess as goodwill (SEC, 2006).
Goodwill or other intangible assets derived from the transaction
Any of the intangible assets that could be amortized from the transactions were generally amortized over useful lives that do not surpass twenty years. Goodwill amassing to amounts of 0.2 billion dollars, 4.8 billion dollars, 0.2 billion dollars and 0.4 billion dollars were allotted or apportioned to Parks and recreation, Studio Entertainment, Media operating segments and consumer products in that respective manner (SEC, 2009). More so, there is no amortization for the goodwill with regards to taxation. This amount did indeed come about from the business combination. This is for the reason that if the company determined that the worth value of goodwill or intangible assets with unlimited lives had become impaired, the business consolidation could experience an accounting charge for the total amount of impairment at the time of the financial period in which the determination would be made. In addition, if the management team of Disney were to alter the suppositions employed in association with the last apportionment of the purchase price, amounts allotted to amortizable intangible assets could possibly have increased or decreased considerably, which could amount to a material rise or decline in amortization of intangible assets (SEC, 2006).
One other intangible asset that was derived from the transaction is the premium that emanated from the valuation of the stocks or the shares. In accordance to the stock exchange information at the time, the stock of Pixar was trading at eighty four times the yearly earnings and was actually the most costly in the industry. On the other hand, the stock of Disney was trading at just seventeen times its yearly earnings and was actually one of the low priced in the industry. This can be attributed to the fact that at that point in time, Pixar was leading the industry as it had six smash hit films while Disney was still struggling to find a success factor to boost its sales. Bearing this in mind, it can be deemed that Steve Jobs traded high priced stock for low priced stock and it appears as if the shareholders of Disney hit the jackpot. However this is not the case as Pixar benefited from a resulting premium. Disney paid $59.78 for every share to Pixar by providing Disney stock. By making a calculation of the premium over the share price of Pixar at that point in time, it is just about 4%. Bearing in mind that this deal took a lot of months to come to completion and the share price increased and went up by almost 10% from the outset of 2006 as a result of the speculation and rumors flying around this transaction amongst the investors, it can be deemed that the real premium to have possibly exceeded the 10% mark. Nevertheless, in view of the fact that Disney paid whole lot more premiums to target for the stakeholders of the companies they previously acquired or merged with such as Marvel (Cochran, 2009), the 10% increase can be perceived to cheap.
Issues Related to Business Consolidations for the Acquisition
In as much as Disney made a 100% acquisition by buying out all of the shares of the company and making it a fully-owned subsidiary, it did not dilute the proficiency and experience levels of Pixar and it turn leveraged its strong suits so as to improve the inventive competence of Disney instead of having strict control. This involved several changes in the ownership of the company, reorganization and insolvency in the business consolidation. To begin with, Steve Jobs who is the founder of Pixar was appointed a member of the board of director having the highest ownership as he controlled 7% of the consolidated business. Ed Catmull who was the president of Pixar was appointed as the president of the animation studios of both companies. The creative director of Pixar, John Lasseter, became the chief creative officer of the animation studios of both companies. This regrouping or reorganization would assist both Disney and Pixar to work together without the obstacles and hurdles that emanate from creating the product from two dissimilar companies with dissimilar shareholders and organization teams (AHaley and Sidky, 2009).
From the business consolidation, it was agreed upon that both companies would retain their individual production unit in a separate manner. Pixar decided to retain its locality and s...