Introduction
The Walt Disney Company (Disney) merged with 21st Century Fox (Fox) in 2019 in one of the most expensive mergers in history. The merger cost amounted to $ 71.3 billion and was a significant development in global media. Disney started in 1935 as a carton studio and evolved into sports coverage and television shows. Fox was founded in 1923 and is an American mass media company primarily dealing in the film and television sector. Disney and Fox were already two major players in the entertainment industry, responsible for over 90% of media output. The merger saw Disney receive assets and intellectual property from Fox and was part of a longer-term strategic plan. Disney’s newly acquired assets include 20th Century Fox cable stations along with a 30% share of the Hulu streaming service (Chen et al., 2021). The merger responded to customer preference for streaming services such as Netflix and Amazon over cable television. Disney was planning to launch its streaming service, Disney+, thus needed Fox content to persuade customers to subscribe to its service.
Financial Statements Analysis
Fox’s annual report revenues included cable network programming, television, and filmed entertainment. Cable network programming was the primary source of income, accounting for 58% in the fiscal year 2018, while the total revenue was $30.4 billion. Disney had a market share of 15.6% in 2018 and Fox 8% before the acquisition (Collins, n.d). Comparing stock prices shows that Fox had a stable stock price than Disney. Disney was up 20% from 2015 to 2017, but the prices dropped before the merger.
Risks
The risks involved in the Disney and Fox merger could have future implications for the company. The most significant risk from including legacy assets represented by cable and satellite television distribution businesses was starting to drop due to customers’ preference for streaming services. The deal failed to offer a premium for Fox assets to compete in distribution channels; thus, the legacy assets only act as a buffer against declines in traditional distribution channels waiting for Disney to increase content on its streaming service. Another risk was how the revenue and earnings Disney’s streaming service could generate based on the loss of licensing revenue from Netflix in 2019 and HBO in 2022.
Netflix and HBO had licenses to Fox movies; thus, the end of the licensing period would define the new era of the Disney streaming service. The Disney-Fox merger would result in a horizontally integrated business, typically carrying more risk. The merger will face more obstacles than a vertical merger because it lowered the number of major studios from six to five, as the regulatory board considered movie and television production studios to be one of the relevant markets (Chen et al., 2021). This would lead to reduced market share as new streaming services would be developed to offer the same service. Disney should have abandoned its legacy distribution system and transformed its acquired intellectual property into newly commercialized products such as toys to diversify revenue streams.
Human Capital Management
Disney executives had forecast approximately $2 billion in cost-saving implementation due to the merger. The company would cut business segments and lay off employees that had duplicate roles. Disney filed layoff notices with the state’s Employment Development Department announcing layoffs at Fox as stipulated under the Worker Adjustment Retraining and Notification Act, where companies must provide 60 days’ notice if they plan to lay off 50 or more workers. Disney laid off 3,000 staff due to the consolidation of both companies (Blake, 2019). Fox employees who had been at the company for over 20 years received stock worth $3,000, and those with shorter tenures received fewer stock options. The most affected departments entailed marketing, distribution and consumer product divisions.
Financial Policies
As part of the deal’s structure, Disney absorbed $13.7 billion in Fox’s debt and paid for the company assets via the distribution of 515 million shares in stock. Disney planned to repurchase $10 billion in stock to offset the dilution (Bourgeault, 2017). This capital restructuring strategy is effective as Disney had a net income of $9 million, thus would offset the debt. In addition, using stock options to buy income-producing assets is a long-term win for Disney as the company could use the dilutive strategy for cash flows, which is more profitable than spending cash (Brigham & Ehrhardt, 2020). This shows that the debt Disney absorbed will offer the company top and bottom-line long-term growth. The company dividend policy entailed paying $2.5 billion, equal to 28% of net income, thus was well covered by its income. The company leveraged its business regarding international currency by acquiring Britain’s Sky Tv and Star India, thus having direct access to subscribers in Europe and India. The diversification of revenue from these international assets could be structured to enable Disney to leverage the dollar, Euro and Indian rupee, thus creating more stability in the global economy.
Conclusion
Disney’s merger with Fox was precipitated by the need to get Fox’s content to launch Disney+ and compete with streaming services such as Netflix. The merger was a success as Disney + received increased subscribers directly associated with Fox content. Disney’s merger with Fox proved successful as it increased the company’s ability to develop and distribute content. Disney should create new media content with the existing intellectual property rights to increase revenue. New original content would increase consumer assets, such as theme parks based on superhero movies.
References
Blake, M. (2019). Disney lays off more than 100 at Fox Studios.Los Angeles Business Journal. Web.
Bourgeault, G. (2017). Disney will significantly increase its risk with the fox deal (NYSE: DIS) | Seeking Alpha. Web.
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage Learning. Web.
Chen, N., Lin, X., Luo, R., & Shao, G. (2021, July). Business Acquisition Analysis. In 2021 International Conference on Economic Development and Business Culture (ICEDBC 2021) (pp. 231-235). Atlantis Press.
Collins, T. (n.d.). Disney will be bloated with debt after buying fox — disturbing problem? TheStreet. Web.