10 page company analysis, example essay attached

Choose company Macy’s or something similar.OverviewA strategic analysis of a company is a major component of this course. It is where you will apply what you have learned to analyze a selected company. Your position is that of a business consultant to the chief executive officer of the company. You have been hired to do a strategic analysis of the company. The goal is to determine what direction the company should take and make specific recommendations about what the company should do next and why.You will individually write a thorough company analysis, which includes five parts:Part 1: Financial analysis to assess the company’s healthPart 2: Internal analysis (including value chain analysis)Part 3: External analysisPart 4: Identification of the firm’s strategyPart 5: RecommendationsDetailed requirements and expectations for each part will be discussed in class and posted in eLearning. This project accounts for 20% of your total grade.1.This assignment requires the use of library/outside research, using sources such as business newspapers, business magazines, library databases (see appendix), and books. Sources such as private blogs / private websites are not allowed. Analysis (not just facts) and recommendations are required.2.Please properly document your sources either in footnotes/endnotes or in (author name, year) format with a reference list attached at the end of your workFormat guidelines:·Double spaced, font size 12, 1-inch standard margin on four sides of the paper.·Sub-titles are required.·Exhibits should be labeled sequentially and in the order they are discussed in the text. If you do NOT talk about an exhibit in the text, it probably isn’t doing anything except taking up space.·Include a title page including your names and an abstract outlining your case study (the abstract should be max 100 words).·We will discuss the report (content, format, etc.) early on in the course.·For each part, there should be about 2 pages excluding the title page and any attachments, such as figures, tables, references and appendix.·For the final project, minimum of 10 pages and maximum of 15 pages of text excluding the title page and any attachments, such as figures, tables, references and appendix.·Please follow the style of your choice for the citation format.Your paper will be graded based on:·Use of concepts learned in class·Reasonableness of analysis·Appropriateness of recommendations/conclusions·Storyline and professionalism of manuscriptIn general, the best papers will show evidence of some investigative efforts—digging for more information, interviews/phone calls/emails with managers—and of synthesis and careful editing. They will also be insightful, going beyond the most obvious lessons to draw out the story behind the story.Strengthening aspects:Detrimental aspects:·Evidence of thorough company study.·Judgments supported by evidence from the sources.·Clear articulation of the issues you are addressing.·Use of professional tools and concepts from the text and lectures.·Justification for the recommendation that is consistent with company strategy and its resources.·Failure to ANALYZE. Don’t just give facts, do ANALYSIS!·Failure to support opinions by evidence or logical explanation.·Lack of adequate outside research, such as relying on Google or Wikipedia for information versus the library’s databases.·Poorly edited or organized or presented clearly (i.e. Failure to proofread and correct obvious errors)·Exhibits that are extraneous to the analysis. The reader or viewer is left to draw his/her own conclusions and wonder why the exhibit is there.Other requirements are:·I take plagiarism very seriously. If you plagiarize others’ work in any way, you will be reported immediately and receive a zero for your paper.·While you may form study groups to discuss your company, the paper should be written on an individual basis.·Extensive library research is required. The internet may be used but only along with other sources. If your paper has only internet sources, such as Wikipedia, but without library sources, you will not receive points for references.·The final project should include at least six references.
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Running head: DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
Disney’s Purchase of 21st Century Fox Assets
The College of New Jersey
1
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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Abstract
Disney must reevaluate its network portfolio to adjust for the rise of streaming and ‘cordcutting’ within the cable industry. To increase its leverage, Disney will acquire production,
distribution, and media assets from 21st Century Fox. This case confirms that Disney’s ‘double
down’ strategy will allow it to negotiate cable contracts in spite of ‘skinny bundling’ and
developing a direct to consumer streaming service in 2019.
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
3
Introduction
Company Profile
The Walt Disney Company is the 15th most valuable company in the world and employs
over 195,000 employees. In FY 2017, Disney earned approximately $55 billion in revenue
through its operation of its four business lines (See Exhibit 1). These include Media Networks,
Parks and Resorts, Studio Entertainment, and Consumer Products and Interactive Media.
Bob Iger, Disney’s chairman and CEO, has been with the company since 1999 (serving
as CEO of the last 13 years). Before joining Disney, Iger was the president of ABC and currently
sits on the Board of Directors for Apple. Iger is ranked 24th in Harvard Business Review’s “Top
100 Best-Performing CEOs of 2017” and was responsible for Disney’s purchases of Star Wars,
Marvel Studios, and Pixar (The best, 2017).
Case Introduction
On December 14, 2017, Disney finalized a deal with 21st Century Fox Inc. to buy critical
parts of the company for over $52 billion. These components include, “Fox television and film
studios, cable networks including FX and National Geographic Channel, Star India, a 39% stake
in Sky, 22 regional sports networks and majority control of streaming-video service Hulu” (Fritz,
Sharma, & Rabil, 2017). The CEO of Disney, Robert Iger, expects the deal to, “create more
content, serve consumers better on the domestic and international level and essentially grow our
offerings to consumers in multiple ways” (Transactional call, 2017). As the company’s most
significant deal so far, its outcome will shape the legacy of Iger as a CEO. This case will include
a financial analysis of Disney’s business lines regarding market share and profitability, an
internal analysis of the company’s value chain, an external analysis of the industry forces, and an
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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explanation of the company’s core strategy including steps the company can take moving
forward. This review supports the company’s acquisition while strategically covering various
alternatives strategies for the company.
Financial Analysis
Although this case primarily focuses on Disney’s strategy concerning its film and
television businesses, it will analyze the financial health of each business line based on market
share, profitability, and growth with that of Disney and its competitors. This section will infer
how Disney’s acquisition of 21st Century Fox, as well as an increase in cord-cutting, could
impact each business segment. Finally, this portion will conclude with a look at the terms of the
acquisition and what it means for Disney’s solvency. Unless otherwise specified, all data was
retrieved from Ibiswold.com (See Exhibits 4-10).
Customer Products and Interactive Media
As it is difficult to benchmark the market share of Disney’s Customer Products and
Interactive Media Division, this section will only cover the division’s contribution towards the
company’s total revenue and its profit growth. At 9% of total revenue, the Consumer Products
and Interactive Media division is the smallest division at Disney. This segment is in charge of the
creation, licensing and distribution of Disney products and the third party use of its intellectual
properties. This division operates over 300 Disney stores around the world and is responsible for
licensing the company’s content to game developers. Despite its size, this segment has long been
its fastest growing business segment and highest profit margin (Kalogeropoulos, 2015).
Not only is this segment expected to maintain its profitability, but is revenue is also likely
to grow as the acquisition will introduce Fox’s “The Simpsons” and “X-Men” brands to be
merchandised. Regarding cord-cutting, a reduction in media revenue would not drastically alter
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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this division’s profitability as it often relies on leveraging the company’s conventional
intellectual property (Kalogeropoulos, 2015). It is also important to recognize that as such other
Disney businesses and intellectual property are drives of either this business line’s success or
failure (Singer & Mucha, 2017).
Parks and Resorts
The Parks and Resorts segment is Disney’s second largest business line based on revenue
(see Exhibit 1). Disney’s Parks and Resorts division is also the largest amusement park company
in the world and is significantly higher than its next competitor regarding its revenue (see Exhibit
3). In FY 2017, operating income increased from $3.3 billion to $3.8 billion which was an 8%
increase and marks the only profitable segment from the company during the year (see Exhibit
2). This income growth stems from improved international park attendance despite a 100
million-dollar loss from a two-day closure of Disney World due to two hurricanes (Skift, 2017).
The resiliency of its profitability, speaks to the financial health and international diversification
of Disney’s Parks and Resorts division.
Concerning its market share, Disney owns 49.3% of the US Amusement Park Market
which is twice as much as its nearest competitor (see Exhibit 4). For FY2017 revenue, Disney
earned approximately five times more than NBC Universal Resorts (see Exhibit 5). However,
Disney’s Compound Annual Growth Rate (CAGR) of 8% is half of Universal’s at 16% (see
Exhibit 6). This difference suggests that it is harder for Disney to grow at the same rate as its
much smaller competitor. Regardless of the company’s CAGR in revenue, Disney has a standard
deviation of about 2.3 which is around half that of Universal (see Exhibit 6). The difference in
each companies’ standard deviations suggests that Disney is the less risky business.
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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Based on the above analysis, it is easy to conclude that Disney’s Parks and Resorts
segment is financially healthy despite its lower profit growth given the stability of its returns (see
Exhibit 6). Similar to its Consumer Product and Interactive Multimedia segment, this division
will not likely be dramatically affected by potential reductions in the company’s media network
division. Much of Disney’s parks and its plans already revolve around the use of its pre-existing
and already proven intellectual property. In fact, it is likely that this division will see an increase
in its revenue as an acquisition of Fox’s intellectual property will drive growth and lower the
costs of its licensing agreements. Specifically, this cost reduction will occur as the company
reduces its licensing fees for the creation of its “Avatar” inspired amusements in its Animal
Kingdom (Disney, 2017).
Studio Entertainment
Walt Disney Studios is the most massive movie production company in the world.
Disney’s Studio Entertainment division is its third largest business line regarding its revenue
with an industry market share of approximately 20% (see Exhibit 7). Disney’s market share is
around 2% higher than its next competitor, NBC Universal, at 18% and 5% higher than 21st
Century Fox at 15%. For revenue growth, Disney CAGR of 8.6% is second, falling just under
NBC Universal’s CAGR of 9.3% (see Exhibit 8). Additionally, 21st Century Fox’s growth is the
second worst out of its competitors with a CAGR of 5.3%. Although NBC Universal has a
marginally higher annualized return, it also has twice that of Disney’s and 21st Century Fox’s
standard deviation (see Exhibit 8). As such Disney seems to be in line if not better with NBC in
its studio revenue and is growing about the average rate for the industry (see Exhibit 8)
The relatively low-risk nature of Disney’s film returns is likely the result of its core
competency in repackaging its films in the form of various sequels and ‘spin-offs’ to sell familiar
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
storylines to reduce its risk of producing flops. This strategy is present in the company’s
franchises “The Pirates of the Caribbean,” “Finding Nemo,” and “Monsters Inc.”.
It is also important to factor in the effect of the acquisition of Fox’s Film Studios. In
addition to the average $1.25 billion that the company earns in annual income over the last five
years, the company will also add 21st Century Fox ’s average yearly income of $800 million to
its portfolio (see Exhibit 8). This increased production capacity will work out great for the
company as Fox is also a very successful producer of live action movies like the ones that
Disney already produces.
This segment’s revenue growth is negatively correlated with the cable industry’s trend
toward reduced subscription volumes. As such, as a larger increase of people reduce their cable
subscriptions, this business will stand to lose it revenue proportionally. This relationship is the
result of fewer opportunities for the company to license its movies on its channels and other
channels (Epstein, 2015). However, a resultant increase in streaming has also led to more
platforms in which the company can license its films.
Media Networks
Disney’s Media Networks division is its most significant business line at approximately
43 percent of its total revenue. This segment includes revenue from networks including ESPN,
Disney Channel, Hulu and ABC to name a few. Unfortunately, this is one of Disney’s least
financially healthy divisions.
Currently, Disney owns approximately 18.7% of the market share for the US cable
industry and is second only to 21st Century Fox (see Exhibit 9). The next most significant
competitors include Time Warner Inc., NBC Universal, and Viacom Inc. at 18.5%, 11.3%, and
7
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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11.3%, respectively (see Exhibit 9). Regarding its return, Disney is the second-worst performer
concerning is CAGR for revenue, operating income as well as its profit margin.
Disney’s high revenue volatility, low profit-margin, and poor financial standings are
primarily the result of the reduction in its subscriber bases at ESPN (see Exhibit 11). This high
rate of cord-cutting is mainly due to the premium ESPN charges for in its network fees (see
Exhibit 12). The subscription losses for ESPN are worse as the company had previously overpaid
for extended and exclusive contracts with the NBA and NFL (Farhi, 2016). Additionally, the
network also lost viewership through its extended political coverage of this year’s NFL protests
(Farhi, 2016). In FY 2017, losses at ESPN led to a 13% year over year loss in Disney’s Media
Network’s net income, which caused the company’s first negative year since the great recession
(see Exhibit 2).
Regarding the acquisition, Disney’s purchase of Fox’s regional sports networks may
help to turn around the hemorrhaging of cord-cutting that is present at ESPN. It appears that
Disney will have to leverage these assets accordingly to either increase the synergies between
both ESPN and the local packages or the company will have to leverage its sports networks as a
single bundled offering if it wants to turn the network around. The effect of the acquisition in this
potential turn around will be discussed during the segment on Disney strategy moving forward.
Solvency
The current terms of the buyout suggest that every share of 21st Century Fox converts
to .27 shares of Disney. This transaction will lead to Disney diluting its share value by nearly $52
billion to cover the cost of the deal. There will also be an additional $13.7 billion worth of Fox’s
debt that will get transferred over to Disney. This deal should not have a drastic effect on the
company’s solvency since Disney has a debt ratio of .26 which is around 11 points below the
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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industry average and since the purchase will occur through a stock swap (Koren, 2017).
Regarding Disney’s capital structure, it operates under 38% debt financing which equates to $23
billion of long-term debt outstanding. However, since the company will receive $13.7 billion
worth of debt in conjunction with a larger share of assets and since the company is using a stock
dilution method as opposed to debt financing, this transaction should not drastically affect
Disney’s debt to assets ratio. Outside of potential dividend payments towards the newly issued
stock, this buyout would include an almost interest-free payment plan for Disney in which it will
remediate the diluted stock through the use of share repurchases over the course of the next three
years (Fritz, Sharma, Rabil 2017).
Internal Analysis
Value Chain Analysis
Value
Disney’s 2017 mission statement reads, “using our portfolio of brands to differentiate our
content, services, and customer products, we seek to develop the most creative, and innovative,
and profitable entertainment experiences and related products in the world” (About the, 2017).
Based on this statement, it is easy to see that Disney derives its value in its ability to create
unique experiences for people through its use of intersectional business lines. Therefore, this
value chain analysis will look at how Disney’s size leads to its competitive advantages in the
quality of its content, its economies of scale, and its economies of scope.
Competitive Advantages
Disney’s competitive advantage in quality originates from its ability to leverage its assets
to purchase the best forms of technology to produce content for its business lines to inspire
products and services. As such, this competitive advantage in content quality occurs in the
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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technological development section of the value chain provided (see Exhibit 11). This size of
Disney it instrumental to its competitive advantage as it otherwise would not be able to afford to
buy such advance production abilities. In its acquisition of Pixar, Disney was able to purchase
the company when did not have the flexibility to alter its 2d animation division’s. Recently, this
competitive advantage is not use to change the company’s trajectory but rather to speed it up.
Disney’s decisions to acquire 21st Century Fox’s film and tv studios allows that company to
quickly scale without sacrificing its ability to deliver quality media.
Disney also debuts a competitive advantage in its cost efficiencies through its scale of
operations. Disney leverages its economies of scale when it uses the proximity of its various
Disney World Resorts to increase productivity of its labor. For example, at Disney World,
maintenance and custodial staff often travel between parks when they are needed and will
continuously move around. This increase in labor productivity allows Disney to reduce the
number of staff on hand and allows the company to create a competitive advantage which the
next most significant US amusement Park, NBC Universal Resorts, cannot replicate.
Disney’s competitive advantage in size is also present in its use of economies of scope.
For example, Disney leverages its business expertise in the design of its international amusement
parks to ensure that the cultural customizations do not come at a cost to the parks profitability,
efficiency, or quality. As such, the leveraging of business and legal resources over various
divisions and geographic operations allows Disney’s to achieve cost efficiency and improve the
coherence of its brand image overall. In Disneyland Paris, Disney was able to save money
reusing its Magical Kingdom architectural plans to improve the cost and brand continuity
between its various locations (About The Walt, 2017).
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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Weaknesses
Regarding its operations, Disney’s size and intersectionality of its business lines may
prove just as dangerous as they have shown useful for the company. Disney must continue to
develop new forms of intellectual property or else its reliance on acquisitions as a source of
content procurement may put the company at risk of overleveraging itself. Additionally, as
Disney moves closer towards the development of its streaming platform and the continued
growth of its content library, it must be aware of the risks of purchasing content and networks
that it might not be able to leverage across its business lines.
An overreliance on its pre-existing intellectual property may also be worrisome for
Disney regarding its amusement and merchandising offerings as it begins to lose critical
copyrights and trademarks (Carlisle, 2014). If the company, is not consistently updating its
content portfolio to counteract the planned retiring of its icons and brands, it may see substantial
revenue losses based on the removal of such influential franchises. Finally, Disney must worry
about the potential effect of a large-scale flop as the company’s leveraged strategy suggests it
might see a flop decrease multiple revenue sources simultaneously.
Overall, after analyzing the company’s key strengths and weaknesses in its business line,
it is easy to interpret impact that the firms’ strategy will have on if it is successful or if it fails.
Before discussing the firm’s strategy and steps it can take moving forward, the next section will
take a look at the competitive landscape for the overall television industry.
External analysis
Through Porter’s five forces model the competitive landscape of the cable industry is
examined based on its trends and threats to media networks.
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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Bargaining Power of Suppliers
Concerning the bargaining power of suppliers, there is a moderate level by which a
supplier can influence a media networks decision making. Ultimately, the power is a product of
the size of the portfolio that the supplier is bargaining with regards to programming. To illustrate
this concept using Disney, although many of the networks might prefer not to include ESPN in
their bundles, they may be forced to if Disney leverages its weather or news broadcasting
channel.
Threat of New Entrants
The threat of new entrants disrupting this media industry is minimal. Around 80% of
current industry made up of five players (see Exhibit 9). This breakdown leaves the remaining
20% the industry’s business between 372 different companies. These smaller companies do not
have anywhere near the bargaining power of Disney, and it is very likely that new media
networks entering will not have a seat at the table in the way the Disney or 21st Century Fox
does.
Competitive Rivalry
As stated, such a small and prominent set of market leaders suggests that competitive
rivalry will be high. This competition will also rise in conjunction with the introduction of skinny
bundles as market leaders will compete against each other for network inclusion in such
packages.
Threat of Substitutes in the Industry
The threat of substitutes in the industry does not seem to be of much concern for TV
networks. The cost to switch providers can often be high, and customers are usually contractually
obligated to stay in their media packages. However, outside of cable networks, this threat is high
DISNEY’S PURCHASE OF 21ST CENTURY FOX ASSETS
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and is increasingly rising. As new streaming services emerge and channels begin to broadcast
their content online, it is likely that these substitute offerings …
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