Everyone loves Disney. Like Coca-Cola, Disney is predicated on Pavlovian association. It’s there to make us feel something, whether it’s happiness, nostalgia, or childishness. Charlie Munger once described Disney as the equivalent of an oil company that can put the oil back in the ground after it is done drilling so it can drill again.
For a long time in its nearly 100 year history, Disney stayed clear of M&A. It didn’t need to dabble in it. In its internal creativity Disney found abundance. No one could create what Disney could and no one could persuade the consumer like Disney could.
The year 1995 was therefore a pivotal point in Disney’s history as it began a new acquisitive journey when Michael Eisner concluded a $19bn landmark merger between Disney and Tom Murphy’s and Dan Burke’s Cap Cities/ABC. The top TV network, media giant, and owner of ESPN merging with the country’s premier movie producer, a combined powerhouse with 1995 sales of $20.7bn, dwarfing the then entertainment leader Time Warner, was something that drew headlines. This isn’t surprising given that Disney’s market cap the day before the merger amounted to 60% of the combined value and it would turn out the second-largest merger in US history. To get a feel for how big that deal was, at Disney’s current market cap of $319bn, such a deal would require a similar-sized bet of $211bn today.
The deal included a bonus for Disney because it was what brought Bob Iger to the company to start working under Michael Eisner and later succeed him. Getting Iger was a blessing. When he took over the helm in 2005, it was clear that he could tell how important the deal Disney/Cap Cities/ABC deal was to Disney’s power and how big of a masterstroke it was from Michael Eisner. (In the meantime, Disney also acquired Fox Family Worldwide for $2.9bn, starting what would turn out an extensive relationship between Disney and Fox). Over the decade following the Cap Cities/ABC deal, revenues increased 70% and EPS 50%. But Iger wasn’t constrained by those two deals and began to envision something grander in the creative atmosphere. It’s safe to term what happened from there an “acquisition spree”.
Ironically, or fortunately, part of what sparked Disney’s acquisition spree was consecutive failures in the creative department. By the time Iger took over, Disney had experienced a long series of box-office disappointments. The fact of the matter was that Disney couldn’t keep up with Pixar’s success, innovation, and animation technology. Where Disney had built its reputation on successes such as Snow White and Lion King, those productions looked generations old when Pixar came along with Ratatouille, The Incredibles, and Finding Nemo.
Iger knew something drastic had to happen so he decided to reach out to Steve Jobs, CEO and major shareholder of Pixar. He wanted to swallow the whole company to get its animation studio into the Disney fold.
When Iger and Jobs then settled on a $7.4bn price tag, it showed Iger’s strength of conviction. Almost everyone thought the price was too high. But Iger humbly realized that internally building a studio like Pixar’s — generations ahead of everyone else — would be an impossible task to accomplish at a short time frame where Pixar could continue to chip away at Disney’s business in the meantime. And by getting a growing number of hugely successful franchises in the mix, $7.4bn would be a bargain, he thought. The deal re-established Disney at the cutting edge of animation and Iger’s ride of a lifetime began.
From then on, Iger showed a willingness to pay up whatever it took to strengthen the Disney moat — so much so that some deals may have been perceived as undisciplined capital allocation. But Iger had another view. In his first earnings call as CEO, he said the following which showed how he perceived the value of Disney’s acquisitions like few could: