Disney Case Analysis Essay

It is 1984, and Disney is the sharpen of a potential coup by notorious greenmailer Sual Steinberg. Disney is faced with the option of fighting the takeover finished the courts and media, or to re buy Steinbergs sh ars, in effect, giving in to his greenmail attempt. However, on that point are m either other essential issues which are facing Disney. These clench from Disneys abysmal finalize out on enclo ascendentnt in juvenile musical composition commons pointments, to the complete failure of Disneys motility hear division, to Disneys alarmingly high dividend abideout post.In the following four sections, we bequeath cry these four issues Disney faces and recommend solutions to improve the financial health of Disney. piece cat valiuming lot expi dimensionn Recently, Disney has been following a bad spendment policy. Disney invested a total of $1. 9 Billion in Epcot over a 6 year period and has increased its capital expenditures on bailiwick put by a total of $1. 277 Billion from 1981 to 1983. Despite these massive investments in its story set, Disney has only earned a return of 4% on Epcot and an overall return on Theme Park assets of 6% in 1983.Disney needs to find a way to to a greater extent than efficiently invest its capital and produce greater returns on its investments. epitome In coif to pick up why Disneys Theme Park investments impart been so unsuccessful, we must analyze a number of different contributing f formors. why Disney is investing in Theme Parks? In regularise to understand why Disney is investing in Theme Parks, we need to take a look at the financial results of Disneys different shares. Out of Disneys 3 segments, diversion and Recreation (or theme parks) is Disneys only segment which is nicely growing its profits in addition to attaining a goodly profit tolerance.Motion depressions is acceptedly suffering, and actually losing m aney. Whereas, Consumer Products is producing profits and holding the greatest profit margin, however profits are not growing signifi lay nightly. after shelter flavor at this analysis and nothing else, it appears as though delight and Recreation is Disneys closely profitable segment and the one which they should be investing in. This is exactly what Disney is doing. Why are special Theme Parks are the Wrong Investment? Before the expansion on bran- impudent theme parks, Disneys older theme parks had enjoyed much success.As upstartly as 1978, Disneys Entertainment and Recreation segment had see a return on assets of 15. 7%. However, as Disney introduced recent theme parks, they reached a point where the optimal total of theme parks had surpassed the contend. This overgorge of theme parks tummy be seen by winning a look at the United States Demographic data provided in the case. First, it must be understood that Theme Park attendance, and in turn r change surfaceues, are driven by the younger demographic. According to the deposeation abo ve, the population conference that drives Theme Park revenues (0 to 14 age old) is actually shrinking from 1970 to 1995.This represents a decrease in demand for Disneys Theme Parks. Yet, at the similar time, Disney is investing in and opening new theme parks. Essentially, Disney is increasing the sum despite a decrease in demand. This is counter intuitive by any economic standard. To further back the claims that Disneys increased investment in theme parks is a bad move lets quickly analyze some measures of financial military ope proportionalityn for their theme park segment. Clearly, the Entertainment and Recreation segment has experienced an abysmal return on assets recently.These numbers are even more disappointing when considering the Entertainment and Recreation segment produced an ROA 15. 7% as recently as 1978. Disney has do the wrong move in investing heavily in additional theme parks despite the population decrease in its important customer segment. In order to impro ve Disneys position, it must pull out some changes. Suggested Changes Overseas Theme Parks The demand for additional theme parks does not exist in the United States, as can be seen from looking at the demographic data above.Therefore, there is no reason for Disney to pass off expanding and investing in additional United States theme parks. Disney needs to directly stop United States theme park expansion. However, this does not mean that Disney must stop investing in theme parks altogether. Disney should look to other countries where there is a demand for theme parks. By looking for countries where the demographics are in their favor and there is sufficient demand without oversupply, Disney can begin to earn sufficient returns on their theme park investments. Management Change Disneys trouble should go for foreseen the downside of overexpansion.Its even feasible that management did realize the lack of demand, however they may feed wanted to extract us much demand as possible b y building more theme parks. Either way, the finis to invest so heavily in theme parks despite their important market segment shrinking for the foreseeable future is incomprehensible. Earning a ROA of 6% in 1983 on theme parks assets when a 1983 T-Bill earns 8. 86% shows an abysmal utilization of assets. Management responsible for the decision to invest so heavily in theme parks needs to be fired from the society. murder How to Expand OverseasFirst, Disney needs to give birth market research in numerous modernized foreign countries. The focus of this research needs to be on the demand levels for a theme park, and whether the demand outweighs the current supply of theme parks in each country. Once Disney chooses the country with the most favorable supply and demand situation, it can begin analysis to train whether or not they should actually construct a theme park in that country. They go away estimate costs and future cash flows in order to conduct a NPV analysis in order to watch whether or not Disney should actually construct a theme park in that country.How to Implement Management Change Ask around management, and conduct interviews with high level managers in order to determine who was responsible for the decision to invest more heavily in theme parks. Once you overhear identified the main individual or individuals responsible for the decision, you let them greet that they are being let go for their ineptitude. Then, search for top management at other similar companies (or any promising prospects within Disney) to hold the open positions. Motion Pictures Issue The motion pictures business has been historically one of Disneys steadyest segments since the corporation was founded.Over the years, classic films like Snow innocence and Cinderella have provided valuable revenue streams for the company. Films have accounted for a significant enume charge per unit of Disneys salary and had a large impact on the performance of the company. However, i n recent years the motion picture segments performance has been lackluster and recording an operating loss of $33. 3M in 1983. The recent failures in the motion picture segment had a profound ruffle effect on Disneys financial performance. Just two years ago the same division boasted a 17. 59% profit margin and operating income of $34. M. Analysis The recent missteps can be attributed to a failed TV channel startup, lack of a blockbuster movie hit, and the cancelation of a new Disney TV show on CBS. Although the film industry in public was suffering in 1983, the performance of Disneys motion pictures division was abysmal. Suggested Changes young Management Performance in this division has steadily declined over the aside three years. sunrise(prenominal) genius needs to be brought in to attend revitalize this division. Disney has been a household name since the advent of cinema and should not be lagging behind their rivals.Management needs to be held responsible for these fai lures. out fruitd Investment in Film Disney has arguably been one of the most successful film companies in the world since it was started in 1923. Creating, distributing, and selling films have been a core competency of Disney for many years. Disney needs to invest more money into creating innovative films and future blockbusters. For the past several years, there has been a disparate amount of funds invested into their park business compared to the motion picture segment. Disney needs to focus on their core competency of film and invest into motion pictures.Historically, this business has proved to be lucrative and these additional resources ordain economic aid pay future blockbuster movies. Implementation How to Acquire New Management Currently, many of the Disney executives worked under Walt Disney, himself, and often wont play projects due to the reasoning that Walt wouldnt do that. It is hard for creative talent to come up with great ideas and have them put down without an y reasoning, other than a dead man wouldnt have pass their ideas or projects. The current executives ties are too strong to the late Walt Disney and at to the lowest degree some of them need to be replaced with invigorated blood.Fire the executives who are the most repeat offenders of the above mentioned offense. In order to replace them, we suggest that Disney looks to other top movie studies for executive talent. How to Increase Investment in Film While Disney is halting its theme park expansion in the United States and conducting market research overseas for new sites, a lot of additional capital will be manufacture around waiting to be invested. Once the new executives are in place, we suggest that Disney allocates a considerable amount of its free capital to motion pictures and see what kind of results that its newly hired executives can produce.Dividend Policy Issue One of the many vital points of interest that Ron milling machine must address as Disney moves into the futu re is making a decision on its dividend policy. When looking at the dividend policy of the company, it is critical to conduct a financial ratio analysis of the company. Upon doing so, certain trends can be noticed. One of these noticeable trends happens to supervene within the dividend payout rate. For over a decade, the dividend payout rate fluctuated only slightly staying in the range of 4% to 8%. Then beginning in 1978, the dividends began to increase exponentially arriving at a rate of 44. 4% only quintuplet years later in 1983. This five year spike in the dividend payout rate has come at the same time as the earnings per share continue to fall. This immediately should raise concerns for the financial security of the company. Analysis In deciding on a dividend policy, it is crucial for the company to purpose how growth oriented it would like to be. Speaking simply, the more dividends Disney decides to pay out, the little retained earnings it has to put into future positively valued projects. This can be seen in the companys sustainable growth rate. cypher for 1883, the growth rate is only 3. 70% Given the large dividend payout rate of 44. 44%, Disney cannot grow with retained earnings at anything more than a modest 3. 70%. If Disney wanted to grow more than that, it could consider taking on more debt. The company has historically been averse to taking on too much debt and will most likely want to continue that trend into the future. If Disney wants to continue to grow without taking on debt, the company will need to consider lowering the dividend payout rate. Suggested Change Lower DividendsTo align the dividend payout rate more closely with earnings per share along with setting the company up for more future growth projects, it is crucial in Disneys financial planning that they cut back the dividend rate. It is our suggestion that Disney reduces its dividend so that its dividend payout ratio is in line with its historic payout of about 7. 50%. This wi ll take in Disney to cut its dividend down to $. 20 per share (based on 1983 EPS of $2. 70 per share). diminish the dividend to $. 20 per share would nearly double Disneys sustainable growth rate, increasing it to 6. 16%.As a result, Disney would be able to finance more projects through retained earnings and continue to keep its supplement down. Implementation How to Lower Dividends Obviously, shareholders are not going to be joyful to hear that you want to cut the dividend by 83%. This is why you have to issue a press release for general shareholders and at least a conference call or meeting with major shareholders to inform them of your intentions. During the conversation with shareholders, you are going to have to explain how it was a slue in the past to increase dividends as earnings per share move to slide.Let the shareholders know that you are going to correct this mistake now, quite than letting it continue to slide. Finally, mention that decreasing dividends will also help Disney remain a financially healthy company by retentiveness its debt low. Corporate Takeover Attempt Issue Possibly the most important issue faced by Ron Miller and the leadership of Walt Disney Productions is the imposing takeover attempt by hearty-known corporate raider, Saul Steinberg. This attempt has been sparked by Walt Disneys current financial situation and performance.Currently, Disney seems to be an ideal target for a takeover. Disney has a great amount of cash on hand, totaling about $18 million. This, along with Disneys underperformance and inefficiencies, are strong motivating factors for Steinbergs attempt. It is likely that Saul Steinberg believes Walt Disney Productions to be undervalued. This is a conclusion shared by most raiders about the targets in takeover attempts. Disney is currently trading at $50 per share. Steinberg just initiated a tender offer for 49 pct of the company for $67. 50 per share.This is where Ron Miller must face a vexed decision by giving in to the greenmailing attempt by agreeing to bargain for back Steinbergs shares at a premium, or letting Walt Disney Productions fall victim to a takeover. Analysis It is essential for the future of Disney for us to attend the value of the company. From there, Disney must decide at what price, if any, should they buy back Steinbergs shares. As stated earlier, Disneys stock has been recently trading at $50 per share. (Graph) For our analysis of valuing the company, we calculated a WACC of 16. 6%, as well as three different possible growth rates of 8%, 11%, and 13%.From these calculations we were able to surmise an estimated company value of $68. 12 per share. This would lead us, as well as Saul Steinberg, to believe Disney to be undervalued. Recommendation Dont Buy Steinbergs Shares To successfully ward of Steinberg and his attempted takeover, Disney must offer him a hefty premium for the purchase of his shares. With his ownership of 12% of the company and his recent attemp t for 49 percent of it, a pivotal decision must be made. However, after valuing the company and weighing possible options, we have come to a recommendation.For the sake of both(prenominal) the shareholders and stakeholders of the company, it would be not be wise to buy the shares owned by Saul Steinberg. A decision to succumb to Steinbergs greenmail would greatly stultify the company from a financial standpoint. If Disney were to buy his share of the company, investors would experience a huge decline in their shares. Such a decision would be made solely to preserve the jobs and welfare of top managers of the company. Disney would be impuissance to maximize shareholder value, thus weakening Disneys position in the market.We concluded that in order to avoid the takeover attempt, Disney would have to pay Steinberg $69 per share. This is $0. 88 more than our estimated value of the company and a 38% premium with respect to the current share price. This would leave Saul Steinberg with $289. 8 million, or a profit of $24 million at the outgo of Disneys shareholders. Implementation Dont Buy Shares, Improve community Instead of buying the shares, Disney should focus on cleaning up its act as a financially sound company, as well as a leader in its respective industries.With the likely replacement of Ron Miller and top executives, Disney would find itself in a position to change its current business policies. Disney is already highly capital intensive, with the recent increased spending on theme parks. The company should not be acquiring more debt by purchasing two new companies with no apparent synergies. Disney should immediately dump these unwisely obtained businesses. The money from these sales would enable Disney to invest in new business ventures, like expanding abroad and tapping into new markets.