On May 5, 2006, Disney Company completed an all stock acquisition of Pixar, a digital animation studio. Disney believes that the creation of high quality feature animation is a key driver of success across many of its businesses and provides content useful across a variety of traditional and new platform throughout the world.
To purchase Pixar, Disney exchanged 2.3 share of its common stock for each share of Pixar common stock. The value of the stock issues was calculated based on the market value of the company’s common stock using the average stock price for a five-day period beginning two days before the acquisition announcement date on January 24, 2006. The acquisition purchase price was $7.5 billion. The company allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values, which were determined primarily through third party appraisals. The excess of the purchase price over those fair values was recorded as goodwill. The following data summarized the allocation of the purchase price.
Total Asset acquired = $7,682 billion
Total Liability = $187 billion
In connection with the acquisition, Disney Company recorded a $48 million non-cash, non-taxable gain from the deemed termination of the exiting Pixar distribution agreement. The recorded amount represents the net present value of the favorable portion of the distribution fee over the remaining life of the distribution agreement. In addition, Disney also recorded a pre-tax impairment charge totaling $26 million for the abandonment of Pixar sequel projects.
Conduct a research on this acquisition and answer the following questions:-
- What is the reason for Disney Company to acquire Pixar?
- What Disney Company financial expectation when they buy Pixar?
- Calculate the amount of goodwill?
Good will = purchase price – net asset
Net asset = asset – liability
7682-187 = 7495 billion
Good will = 7.5- 7495 = ( 7487.5 ) – gain on accusation
- Where does Company record the gain of $48 million and impairment charges of $26 million?
- Collect annual report for Disney for the year 2005 and 2006 and answer the following questions:-
- Calculate the profitability ratio (8 ratios) for the year 2005, 2006 and 2007 for Disney Company
- Analyze the performance of profitability ratio throughout the 3 years.
- Are there any effects (positive or negative) on Disney profitability ratio resulting from the acquisition of Pixar.
- Is buying Pixar really benefit Disney/ meets their expectation?
|Return on asset||4.77||5.96||7.75
|Return on equity||9.66||11.63||14.98|
|Earning per share||1.25||1.64||2.25|