This is hopefully not a spoiler for anybody, but Disney will make a lot of money from Star Wars. While most of you will put this statement down as one of the most obvious things you heard in 2015, the reality is most companies do not make money from acquisitions. Although there are no firm figures, an article in Business Insider showed that 50 to 90 percent of M&A (mergers and acquisitions) deals failed to meet their financial expectation; in my experience the reality is probably closer to the 90 percent number as creative accounting hides some of the failures.
Even with these numbers, you can initially write off the success of Disney’s acquisition of Lucasfilm as just luck; even though the majority of M&As fail, some do succeed. Upon further review (as we like to say at this point of the NFL season), however, it becomes clear that Disney has instead used acquisitions to create hundreds of billions of dollars of value.
- Disney’s acquisition of Pixar has led to multiple billion dollar franchises (from Toy Story to Cars)
- Disney’s acquisition of Marvel has helped them created multiple billion dollar film franchises (Avengers, Iron Man, Captain America, Guardians of the Galaxy)
- Disney acquisition of ESPN has created a cash machine that largely drives Disney’s profitability (despite a recent slowdown)
So why was the Star Wars acquisition destined to succeed, while so many acquisitions by other companies are doomed to fail? It is due to a combination of investing in the acquisition, understanding the underlying value of what they bought, finding real synergies with other parts of their business and true efforts to retain and build the team.
Investing in the acquisition
When many companies make an acquisition, the cost of the acquisition is often seen as the primary cost. The acquirer is looking at the acquisition to contribute to its business rather than requiring additional investment. Many companies are acquired because they are growing but growth is not easy or automatic. They are often growing because of internal investment in their business. When this internal investment is diverted to the parent company, it moves the company off the growth path.
Star Wars is a great example of how Disney does things differently. Rather than trying to recoup the $4 billion it paid for Lucasfilm by squeezing the Star Wars franchise to get the most revenue from existing Star Wars revenue streams (e.g., toy sales, new distribution of the past movies), Disney invested an additional $400 million to create two new movies. Not only will this investment more than pay for itself (the movie is on its way to generating $1 billion) it reinvigorated sales for the IP overall. Continue reading “Anatomy of the perfect acquisition”