Disney Case Analysis Essay

It is 1984, and Disney is the tush of a potential coup by nonorious greenmailer Sual Steinberg. Disney is faced with the survival of fighting the takeover through the courts and media, or to repurchase Steinbergs sh bes, in effect, giving in to his greenmail attempt. However, there ar m whatsoever other st locategic issues which atomic number 18 facing Disney. These range from Disneys abysmal return on investment in young typography lay investments, to the complete chastisement of Disneys gesture picture partitioning, to Disneys alarmingly high dividend payout ordinate.In the following four sections, we will address these four issues Disney faces and recommend solutions to cleanse the pecuniary health of Disney. bag park mercantile establishment Recently, Disney has been following a bad investment policy. Disney invested a total of $1. 9 cardinal in Epcot over a 6 year period and has increased its detonating device expenditures on bailiwick put by a total of $1. 277 Billion from 1981 to 1983. Despite these massive investments in its composing parks, Disney has only earned a return of 4% on Epcot and an overall return on subject field parking lot assets of 6% in 1983.Disney ask to find a room to more efficiently invest its expectant letter and produce greater returns on its investments. Analysis In show to understand why Disneys writing Park investments reserve been so unsuccessful, we must analyze a good turn of different contributing factors. Why Disney is spend in Theme place? In order to understand why Disney is commit in Theme Parks, we need to take a look at the financial results of Disneys different ingredients. Out of Disneys 3 parts, cheer and Recreation (or cornerstone parks) is Disneys only segment which is nicely ageing its profits in addition to attaining a powerful profit margin.Motion pictures is currently suffering, and really losing money. Whereas, Consumer Products is producing profits and holding th e greatest profit margin, however profits are non growing signifi jakestly. After looking at this outline and cryptograph else, it appears as though Entertainment and Recreation is Disneys some economic segment and the one which they should be investing in. This is exactly what Disney is doing. Why are additional Theme Parks are the Wrong Investment? forward the expansion on saucily piece of music parks, Disneys older theme parks had enjoyed more or less(prenominal) success.As recently as 1978, Disneys Entertainment and Recreation segment had experienced a return on assets of 15. 7%. However, as Disney introduced vernal theme parks, they reached a point where the optimal hang on of theme parks had surpassed the de homophiled. This oversupply of theme parks buns be seen by pickings a look at the coupled States demographic data provided in the case. First, it must be understood that Theme Park attendance, and in turn r pointues, are driven by the younger demographic. ji be to the information above, the reality group that drives Theme Park revenues (0 to 14 historic period old) is actually shrinking from 1970 to 1995.This represents a decrease in demand for Disneys Theme Parks. Yet, at the aforementioned(prenominal) time, Disney is investing in and opening new theme parks. Essentially, Disney is increasing the supply despite a decrease in demand. This is counter intuitive by any economic standard. To further punt the claims that Disneys increased investment in theme parks is a bad move lets quickly analyze most measures of financial performance 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 made the wrong move in investing heavily in additional theme parks despite the population decrease in its main custome r segment. In order to remediate Disneys position, it must make some changes. Suggested flip-flops 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 continue expanding and investing in additional United States theme parks. Disney demand to immediately s baksheesh 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 promote and there is commensurate demand without oversupply, Disney can begin to earn sufficient returns on their theme park investments. centering qualify Disneys counselling should stool foreseen the downside of overexpansion.Its even contingent that management did realize the overleap of demand, however the y may exhaust wanted to extract us much demand as possible by building more theme parks. Either way, the closing to invest so heavily in theme parks despite their main merchandise segment shrinking for the predictable hereafter 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 company. Implementation How to Expand OverseasFirst, Disney needs to assume market research in numerous modernized foreign countries. The revolve about(predicate) 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. erstwhile Disney chooses the country with the most favorable supply and demand note, it can begin analysis to determine whether or not they should actually manufacture a theme park in that country. They will estimate cost and future cash flows in order to acquit a NPV analysis in order to determine whether or not Disney should actually require 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 have identified the main individual or individuals responsible for the decision, you let them know that they are being let go for their ineptitude. past, search for top management at other similar companies (or any promising prospects within Disney) to fill the open positions. Motion Pictures Issue The execution pictures business has been historically one of Disneys strongest segments since the company was founded.Over the years, unmixed demands like Snow White and Cinderella have provided valuable revenue streams for the company. submits have accounted for a significant add of Disneys lucr e and had a vainglorious impact on the performance of the company. However, in recent years the motion picture segments performance has been lackluster and recording an direct loss of $33. 3M in 1983. The recent failures in the motion picture segment had a profound ripple effect on Disneys financial performance. Just two years ago the same division boasted a 17. 59% profit margin and operating in cut of $34. M. Analysis The recent missteps can be attributed to a failed TV channel startup, lack of a smash hit movie hit, and the cancelation of a new Disney TV show on CBS. Although the film industry in general was suffering in 1983, the performance of Disneys motion pictures division was abysmal. Suggested Changes New Management Performance in this division has steadily declined over the then(prenominal) three years. New talent needs to be brought in to help revitalize this division. Disney has been a household induce since the advent of cinema and should not be lagging behind the ir rivals.Management needs to be held accountable for these failures. Increased 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 marrow squash competency of Disney for umpteen years. Disney needs to invest more money into creating innovative films and future smash hits. For the past several years, there has been a disparate list 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 will help finance future blockbuster movies. Implementation How to Acquire New Management Currently, many of the Disney executives worked under Walt Disney, himself, and often wont accept projects due to the reasoning that Walt wouldnt do that. It is hard for creative ta lent to come up with great ideas and have them put down without any reasoning, other than a dead man wouldnt have approved their ideas or projects. The current executives ties are too strong to the late Walt Disney and at least some of them need to be replaced with fresh blood.Fire the executives who are the most re big(p) 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 fleck 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 lying 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 chartered executives can produce.Dividend Policy Issue One of the many vital points of recreate that Ron miller m ust address as Disney moves into the future 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 fall 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 phoebe bird years later in 1983. This five year spike in the dividend payout rate has come at the same time as the network per trade continue to fall. This immediately should cite concerns for the financial security of the company. Analysis In deciding on a dividend policy, it is crucial for the company to decide how festering oriented it would like to be. verbalize simply, the more dividends Disney decides to pay out, the less retained earning s it has to put into future positively ranged projects. This can be seen in the companys sustainable growth rate.Calculating 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 address along with setting the company up for more future growth projects, it is crucial in Disneys financial planning that they cut put up 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 will require Disney to cut its dividend down to $. 20 per contribution (based on 1983 EPS of $2. 70 per share). Decreasing the dividend to $. 20 per share would nearly stunt woman 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 leverage down. Implementation How to Lower Dividends Obviously, shareholders are not passing game to be happy to hear that you want to cut the dividend by 83%. This is why you have to issue a press sledding 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 mistake in the past to increase dividends as earnings per share continued to slide.Let the shareholders know that you are going to correct this mistake now, rather than letting it continue to slide. Finally, mention that fall dividends will also help Disney remain a financially healthy company by keeping 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 well-known corporal 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 ardent offer for 49 percent of the company for $67. 50 pe r share.This is where Ron Miller must face a difficult decision by giving in to the greenmailing attempt by agreeing to purchase 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 examine the value of the company. From there, Disney must decide at what price, if any, should they demoralise back Steinbergs shares. As stated earlier, Disneys air 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 dead reckoning 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 defile Steinbergs Shares To successfully ward of Steinberg and his attempted takeover, Disney must offer him a hefty premium for the purc hase of his shares. With his ownership of 12% of the company and his recent attempt 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 the shareholders and stakeholders of the company, it would be not be intoxicating to buy the shares owned by Saul Steinberg. A decision to give way to Steinbergs greenmail would greatly cripple 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 benefit of top managers of the company. Disney would be failing to maximize shareholder value, thus modify Disneys position in the market.We concluded that in order to vitiate 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 wi th respect to the current share price. This would leave Saul Steinberg with $289. 8 million, or a profit of $24 million at the expense of Disneys shareholders. Implementation Dont Buy Shares, Improve Company 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 various(prenominal) 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 gross sales would enable Disney to invest in new business ventures, like expanding abroad and tapping into new markets.