How Battling Firms Can Work Out a Successful Deal: The Disney/Pixar combination points up the added complexities in acquisitions that mesh firms with frosty relations

The surprise reconciliation of Walt Disney Co. and Pixar Animation Studios surfaces an M&A issue that deal pros commonly confront but seldom talk about publicly. A lot of companies trying to hammer out amicable deals don’t like each other or have a history of contentious relations. So why are they at the bargaining table? Because the economics or strategic advantages of the combination are so compelling that the two sides are willing to at least try to bury the hatchet. Nevertheless, deal advisers concede that getting the business imperative to trump emotions is one of the more formidable challenges to successful transactions. Moreover, they say the conflicts cannot be resolved in formal legal documents but must be worked out on a people-to-people basis. While the $7.3 billion Disney/Pixar deal highlights the accentuated potential for friction in big-ticket, high-profile, creative transactions, dealmakers note that edgy relationships can erupt anywhere along the M&A landscape – in basic industries, between companies that have competed bitterly in the same market, or between suppliers and customers with stormy pasts. Not surprisingly, expert negotiators have disagreements over exactly how to cope with the pre-deal friction. While some see it rooted in clashing cultures – commonly cited in Disney/Pixar – others think pinning everything on culture is a stretch. But there is general agreement that differences have to be dealt with if a deal is to create a more valuable combined organization. “Getting clients to think about it in advance is always a good idea,” says Gordon Kaiser, a veteran M&A attorney with Squire Sanders & Dempsey in Cleveland. “The mistake is to think you can deal with it structurally. It’s really a management issue, not a structural issue.” Kaiser and others say that Disney took a long step toward uniting the firms, including assigning key post-deal jobs to top Pixar personnel. Pixar President Ed Catmull will be President of the Pixar and Disney animation studios while EVP John Lasseter was tapped to be Chief Creative Officer of the animation studios as well as Principal Creative Adviser at Walt Disney Imagineering. Exactly what prompted Disney and Pixar to rupture their highly lucrative alliance last year has never been disclosed, but many observers think the soured relationship cannot be separated from two high-power personalities – former Disney chairman and CEO Michael Eisner and Pixar chairman and CEO Steve Jobs. Although Eisner had left Disney, some residual bitterness remained. What rescued the relationship, observers say, was the realization that the two firms were better off sticking together than going their separate ways. Disney retains Pixar’s flair for entertaining, innovative, and highly profitable animated features while Pixar can leverage Disney’s sprawling distribution system for optimal results. Some experts believe that culture accommodation is critical to optimizing the business advantages, noting that Disney opts for a restrictive, button-down environment while Pixar is more freewheeling. Fred Lipman, an M&A attorney with Blank Rome in Philadelphia, sees culture and compensation as inextricably linked ingredients. “I would have tried to see what kind of incentive plans there were at Pixar, what kind there would be at the combined company, and how to maintain that culture before I ever signed the agreement, before I ever valued the company. The whole assumption is that the value is based on the kind of creativity that existed before. Will it be a tight culture or one that brings out the creative juices?” However, Irwin Kishner, a Partner and Chair of the Corporate Department at the law firm of Herrick, Feinstein, says that edginess in reaching M&A agreements is rather common. Almost every deal, he says, has a “certain level of uneasiness since the whole merger process is normally tense.” Disney/Pixar “probably was no trickier to put together than J.P. Morgan and Chase,” he adds. “At the end of the day, it’s generally more of a cleansing process than a meshing of cultures,” he notes. “Disney acquired Pixar. Disney’s culture will prevail. Steve Jobs is a huge shareholder now and, as such, has rights and some protections. But Disney is still larger. There will be cleansing right off the bat and there will be further cleansing several years down the road.” Nevertheless, Kishner notes that Disney “would be wise to allow a degree of autonomy to Pixar, especially at the lower levels, to accommodate the target’s culture.” “Disney was a Pixar once and it would be helpful if it could remember its early days. But pressures inside Disney are likely to challenge Pixar’s startup culture,” he says. Pixar was in many ways created as anti-Hollywood, he asserts. Jim Tamm, a former judge whose specialty is building collaborative work environments, takes a somewhat broader view of the challenge, saying that companies with difficult relationships have to zero in on three key points: inclusion, or how much “interaction people want, and need, to have”; control, or how much influence the companies will have on each other or how much freedom each will enjoy; and openness, or the “level of self-disclosure.” He believes that openness is key with Disney and Pixar. Tamm, a Vice President at Business Consultants Network in San Francisco, says that combining companies that were formerly at sword’s point need these essential skills to work things out: * Collaborative intention, or the ability to “stay focused on mutual gains when they hit a speed bump in the relationship”; * Building an atmosphere of truthfulness, where it’s “safe to discuss difficult issues”; * Self-accountability; * Self-awareness – of their own preferences for inclusion, control, and openness and of their own defensiveness, because “defensiveness leads to rigid thinking, poor problem-solving, and lower creativity and invites others to get defensive”; and * Negotiation, to help iron out differences. “My feeling is that if the two companies, at both the leadership level and in the trenches, can pay attention to inclusion, control, and openness and develop skillfulness in those five areas, they’ll have a pretty high chance of success,” Tamm says. But all the experts note that friction is a recurring element in an environment where hard bargaining is the rule, rivals often are brought together, and personalities can be strong at both the entrepreneurial and hired management levels. “I know of strong personalities in some of the most basic industries, such as chemicals and auto parts,” Kaiser says. “It’s only a matter of degree in such areas as entertainment and high technology. You see it everywhere. The real clash is at the cultural level.” (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com