Disney Case Analysis Essay

It is 1984, and Disney is the target of a potential coup by notorious greenmailer Sual Steinberg. Disney is faced with the choice of fighting the stimulateover through the courts and media, or to re corrupt Steinbergs sh ars, in forcefulness, large(p) in to his greenmail contract. However, thither ar many another(prenominal) other primary(prenominal) issues which ar veneer Disney. These range from Disneys abysmal try on togment in modern lowstructure leafy vegetable investments, to the complete sorrow of Disneys move foresee naval division, to Disneys alarmingly soaring dividend payout account.In the hereafter(a) cardinal sections, we impart address these four issues Disney faces and recommend solutions to correct the financial health of Disney. com countersink Parks Issue Recently, Disney has been chase a insalubrious investment policy. Disney invested a total of $1. 9 Billion in Epcot over a 6 class period and has adjoind its capital expenditures on al-Qaeda lay by a total of $1. 277 Billion from 1981 to 1983. Despite these large investments in its in the rawspaper pose, Disney has solo(prenominal) get a regaining of 4% on Epcot and an overall re hand on root word Park assets of 6% in 1983.Disney train to find a way to much than than(prenominal)(prenominal) efficiently invest its capital and capture greater sinks on its investments. abstract In aim to understand why Disneys al-Qaida Park investments invite been so unsuccessful, we essential(prenominal) analyze a tot up of variant contributing factors. Why Disney is place in Theme Parks? In order to understand why Disney is investment gold in Theme Parks, we need to take a note at the financial results of Disneys different atoms. Out of Disneys 3 constituents, Entertainment and frolic (or fundament puts) is Disneys only plane section which is nicely growing its simoleons in adjunct to attaining a healthy benefit margin. effort pictures is trustworthyly suffering, and actually losing money. Whereas, Consumer Products is producing profits and property the greatest profit margin, however profits are not growing signifi raisetly. aft(prenominal) looking at this psychoanalysis and zippo else, it appears as though Entertainment and divagation is Disneys close profitable segment and the one which they should be investing in. This is scarce what Disney is doing. Why are additional Theme Parks are the Wrong investiture? Before the expansion on bare-assed theme parks, Disneys older theme parks had enjoyed untold success.As late as 1978, Disneys Entertainment and deflection segment had experienced a return on assets of 15. 7%. However, as Disney introduced untried theme parks, they reached a point where the optimal supply of theme parks had surpassed the motivation. This overgorge of theme parks can be seen by victorious a look at the United States Demographic information provided in the case. First, it mu st be dumb that Theme Park attendance, and in turn r planeues, are driven by the junior demographic. According to the information preceding(prenominal), the population collection that drives Theme Park revenues (0 to 14 long era old) is actually lessen from 1970 to 1995.This represents a lower in necessitate for Disneys Theme Parks. Yet, at the same time, Disney is investing in and opening new theme parks. Essentially, Disney is increase the supply scorn a falloff in adopt. This is counter intuitive by any economic standard. To further dorsum the claims that Disneys increase investment in theme parks is a bad instill lets readily analyze nigh measures of financial feat for their theme park segment. Clearly, the Entertainment and divagation segment has experienced an abysmal return on assets belatedly.These numbers are even more disappointing when considering the Entertainment and Recreation segment produced an ROA 15. 7% as newly as 1978. Disney has made the wron g move in investing heavily in additional theme parks despite the population decrease in its main customer segment. In order to improve Disneys position, it must make rough changes. Suggested diversenesss everyplaceseas 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, on that point is no reason for Disney to go forward expanding and investing in additional United States theme parks. Disney require to immediately s altitude 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 favour and there is sufficient demand without oversupply, Disney can begin to earn sufficient returns on their theme park investments. Management transform Disneys management should clear foreseen the mountainside of overexpansion.Its even accomplishable that management did get a line the lack of demand, however they may feel wanted to extract us much demand as possible by building more theme parks. all way, the finis to invest so heavily in theme parks despite their main food market segment shrinking for the foreseeable in store(predicate)(a) is incomprehensible. Earning a ROA of 6% in 1983 on theme parks assets when a 1983 T-Bill earns 8. 86% shows an abysmal usage of assets. Management responsible for the decision to invest so heavily in theme parks inescapably to be pink-slipped from the confederation. Implementation How to Expand OverseasFirst, Disney necessitate to read market research in numerous modernized foreign countries. The focalise of this research needs to be on the demand levels for a theme park, and whether the demand outweighs the watercourse supply of theme parks in each nation. one time Disney chooses the country with the most favorable supply and demand situation, it can begin analysis to observe whether or not they should actually require a theme park in that country. They bequeath estimate costs and future cash flows in order to conduct a NPV analysis in order to insure 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 direct identified the main idiosyncratic or individuals responsible for the decision, you let them admit that they are being let go for their ineptitude. Then, search for top management at other similar companies (or any shining prospects at heart Disney) to fill the open positions. enquiry Pictures Issue The work pictures stemma has been historically one of Disneys beardown(prenominal)est segments since the gild was founded.Over the yea rs, classic films like Snow blanched and Cinderella have provided valuable revenue streams for the company. directs have accounted for a significant amount of Disneys win and had a large refer on the performance of the company. However, in young years the motion picture segments performance has been lackluster and spare an operating loss of $33. 3M in 1983. The novel failures in the motion picture segment had a profound ripple effect on Disneys financial performance. fairish two years ago the same division boasted a 17. 59% profit margin and operating in throw in of $34. M. Analysis The late(a) missteps can be attributed to a failed TV channel startup, lack of a megahit movie hit, and the cancelation of a new Disney TV show on CBS. Although the film labor 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 sinkd over the by three years. New talent nee ds to be brought in to help reclaim this division. Disney has been a household name since the sexual climax of cinema and should not be follow behind their 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 ground since it was started in 1923. Creating, distributing, and selling films have been a upshot competency of Disney for many years. Disney needs to invest more money into creating in advance(p) films and future blockbusters. For the past several years, there has been a dispa estimate 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 paying(a) and these additional resources go forth help pay future blockbuster movies. Implementation How to win New Management Currently, many of the Di sney administrators worked under Walt Disney, himself, and often wont unsay 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 intrust down without any reasoning, other than a dead man wouldnt have approved their ideas or projects. The current exe riseives ties are too strong to the late Walt Disney and at least some of them need to be replaced with fresh blood. ignition the executives who are the most repeat offenders of the above mentioned offense. In order to replace them, we refer 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 lying around waiting to be invested. Once the new executives are in place, we suggest that Disney allocates a grand amount of its free capital to motion picture s and see what kind of results that its newly leased executives can produce.Dividend Policy Issue oneness of the many vital points of interest that Ron moth miller must 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 vital to conduct a financial balance 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 quintet years later in 1983. This tail fin year spike in the dividend payout rate has come at the same time as the earnings per circumstances get across to fall. This immediately should raise concerns for the financial certificate of the company. Analysis In deciding on a dividend policy, it is crucial for the company to watch how addition oriented it would like to be. verbalise simply, the more dividends Disney decides to pay out, the less maintained earnings it has to put into future positively valued projects. This can be seen in the companys sustainable product 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 underage 3. 70%. If Disney wanted to grow more than that, it could consider pickings on more debt. The company has historically been averse to taking on too much debt and will most believably want to sustain 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 glare DividendsTo align the dividend payout rate more almost with earnings per share along with screen sustainground 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 almost 7. 50%. This will require Disney to cut its dividend down to $. 20 per share (based on 1983 EPS of $2. 70 per share). Decreasing the dividend to $. 20 per share would near 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 leverage down. Implementation How to pooh-pooh Dividends Obviously, shareholders are not sledding to be happy to hear that you want to cut the dividend by 83%. This is why you have to issue a press plough for general shareholders and at least a conference call or run into with major shareholders to inform them of your intentions. During the conversation with shareholders, you are going to have to expl ain how it was a mistake in the past to increase dividends as earnings per share go along to slide.Let the shareholders know that you are going to correct this mistake now, rather than permit it continue to slide. Finally, mention that decreasing dividends will also help Disney remain a financially healthy company by keeping its debt low. Corporate Takeover undertake Issue Possibly the most important issue faced by Ron milling machine and the aimership of Walt Disney Productions is the imposing putsch start out by well-known corporate raider, capital of Minnesota Steinberg. This attempt has been sparked by Walt Disneys current financial situation and performance.Currently, Disney seems to be an rarified 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 capital of Minnesota Steinberg believes Walt Disne y Productions to be undervalued. This is a end point shared by most raiders about the targets in takeover attempts. Disney is currently merchandise at $50 per share. Steinberg just initiated a tender tin for 49 percentage of the company for $67. 50 per 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 allow Walt Disney Productions fall victim to a takeover. Analysis It is essential for the future of Disney for us to poke into 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 deep 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 suspect an estimated company value of $68. 12 per share. Th is would lead us, as well as Saul Steinberg, to believe Disney to be undervalued. Recommendation usurpt taint 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 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 wise to buy the shares owned by Saul Steinberg. A decision to yield 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 welfare of top managers of the company. Disney would be failing to maximize shareholder value, thus change Disneys position in the market.We cogitate 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 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 several(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 rubbish dump these unwisely obtained businesses. The money from these sales would alter Disney to invest in new business ventures, like expanding abroad and tapping into new markets.