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The attractiveness test: structural attractiveness

Disney wanted to grow its entertainment business, and be the #1 entertainment company.

ABC had been the top rated network and built a global media network channel. Acquiring ABC

would give Disney access to viewers around theworld.

At the time of the merger, Disneys business portfolio consisted mostly of cash cows:

studios, theme park, consumer products. Disney had significant market share and revenues, but

the markets served were experiencing low growth rates, with the exception of internet content

which Disney had a very small market share.

The media network business was, at that time, still a high growth business with a growth

rate of 20.6% (calculated from ABCs revenue 5 years following the merger), and ABC at that

time was the market leader in that segment which would make it a star in the BCG matrix. Given

Eisners goal of achieving return on stockholder equity of more than 20%, ABC offered high

growth rate which fitted very well into Eisners plan.

The cost-of entry test: cost of entry should not capitalize all the future profits

Disney bought ABC for $19 billion, which was the second largest acquisition in the US

history. The acquisition made Disney the largest entertainment company in the US.

The merger involved each Capital Cities shareholder receiving one share of Disney stock in

addition to $65 cash represented a 27% premium over the market price of Capital Cities stock.

This deal led to additional debt of $9 billion for Disney which reduced the companys excess

cash flows. The deal transformed Disney from a company with 20% debt ratio to one with a 34%

debt ratio ($12.5 billion) after the takeover.

Therefore, the cost of entry was high as Disney was paying a premium of 27% over the

market value of Capital Cities, and to sustain the current level of ROI the profits of ABC should

grow by that margin.

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But there was a decline in the profits after the merger occurred because the company

wasted considerable amount of time in fully integrating ABC with Disney, which resulted in

high levels of inefficiency.

The better-off test: competitive advantage from its link with the corporation

ABCs acquisition complemented Disneys corporate strategy of vertical integration,

giving more control over the value chain. Instead of relying on partnerships and agreements with

various distribution networks; Disney would own distribution network for complete control over

its contents, as well as consolidated resources and reduced cost of operations.

The acquisition also added to Disneys horizontal integration as a content provider. ABChad rights to content media different from Disneys traditional studio business. One such content

category was sports, namely the ESPN sports channel, which was the most profitable sports

channel at that time, as well as content targeted towards the adult audience. This would also

enable cross-promotion between Disneys content and ABCs content.

Overall, the increased vertical and horizontal integration would open up possibilities for

synergy, which Michael Eisner had made a focal point of his management team. There were

several well-intentioned strategic reasons why the merger made sense both to ABC and Disney,and they were aligned with Disneys corporate strategies of fostering synergy, encouraging

creativity, controlling quality and improving financial performance.