Disney’s belated dividends from its 2019 Fox acquisition

It takes a high-quality crystal ball for an acquirer to spend $50-80 billion for a major studio. Rarely does it succeed.

By Jeffrey Cole

Finally, after seven years, Disney has something to crow about from its 2019 acquisition of 21st Century Fox. It has the highest grossing film of the year with Inside Out 2 at $1.66 billion. That came from Pixar (which it acquired in 2006).

But the current second-highest grosser, Deadpool & Wolverine, is already at $1.257 billion, still #1 at the box office in its sixth week, and sure to best Inside Out 2 very soon. Deadpool and two other top grossing films also came from Disney’s purchase of Fox: Kingdom of the Planet of the Apes ($397 million) and Alien: Romulus ($293 million and counting, currently #2 at the box office).

This is a delayed, much needed, and partial validation of the acquisition.

Deadpool was so conscious of being a Fox-turned-Disney movie that many of its inside references were based on being the first R-rated Disney Marvel film. Ryan Reynolds happily made jokes about words and subjects that had never been part of a Disney film before. He even called out Kevin Feige, the head of Marvel, by name when he used R-rated content.

Deadpool has become the highest grossing R-rated film of all time (passing Joker, another comic book adaptation). The three 2024 films were not the first IP dividends from Fox. The top film of 2022, Avatar: the Way of Water ($2.3 billion) also came from Fox.

I never thought Disney’s acquisition of 21st Century Fox in 2019 was a good idea. Unlike Disney’s other key acquisitions of Pixar, Marvel and Lucasfilm, it was difficult to see what Disney was paying $71.3 billion for that it didn’t already have.

More worrisome, the acquisition of Fox brought the number of major studios down from six to five. The number has been shrinking since the 1930s when there were eight big studios. The loss of each studio meant fewer films, less employment in entertainment, fewer choices for moviegoers, as well as consolidation of industry power.

This summer, it even looked possible that the five remaining majors (Disney, Warner, Sony, Universal and Paramount) might shrink to as few as three. The Redstone Family decided it was finally time to cash out of their ownership of Paramount. It is now clear that David Ellison’s Skydance will control Paramount (and says it plans to keep it running as a stand-alone studio).

However, at one point Sony considered acquiring the Redstone’s assets and would have merged the two studios. Less seriously, Warner Bros. Discovery, deep in debt and facing endless problems, had allegedly been looking at tie-ups with NBCUniversal.

How it all happened

Rupert Murdoch—long the smartest and most influential owner in the media and entertainment business—realized around 2015 that it no longer made sense for him to run a movie and television studio. As he surveyed the landscape, he could see (ahead of almost everyone) that he was no longer competing with Disney, Warner, and the others for great content. In those battles he could usually win just by spending more.

But, in 2016, Murdoch saw the writing on the wall: he was competing with $2 or $3 trillion dollar companies for entertainment and sports. His new rivals were Apple, Google (You Tube), and Amazon. How could Fox outbid them?

Quietly, Murdoch began to explore whether there was appetite among the other studios to acquire Fox’s entertainment assets. Disney was interested.

No studio had ever been as successful as Disney was in the years leading up to COVID.

In 2019, there were nine billion dollar films; 7.5 of them were from Disney.

Up to the time I’m writing this, since 2019 there have been eight billion dollar films over the past five years from all studios (none in 2020, one in 2021, three in 2022, two in 2023, and two in 2024).

Although Disney was achieving success that no one (even MGM in the 1930s) had ever reached, its CEO, Bob Iger, saw worrisome signs. Disney and all the other studios were making hundreds of millions of dollars selling their content to Netflix. Streaming was a profitable new window with no extra production costs. The studios also made money creating originals for Netflix.

The acquisition of Fox brought the number of major studios down from six to five. The number has been shrinking since the 1930s when there were eight big studios. The loss of each studio meant fewer films, less employment in entertainment, fewer choices for moviegoers, as well as consolidation of industry power.  This summer, it even looked possible that the five remaining majors (Disney, Warner, Sony, Universal and Paramount) might shrink to as few as three.

Netflix made the studios hugely profitable. However, they could see they were funding the creation and growth of a monster competitor. Netflix was trending towards a position where it could dictate prices and policies. Somebody had to step up, stop selling to Netflix, and create streaming competition. In 2017, Iger announced that Disney would create its own streamer to launch in November 2019.

When Disney learned that Fox’s entertainment assets might be for sale, the opportunity was too great to resist. With remarkable stealth, Murdoch and Iger negotiated Disney’s acquisition of Fox. The discussions took place at Murdoch’s home and vineyard near the Getty Museum in Bel-Air. The discussions led to an announcement on December 17, 2017, that Disney would acquire most of Fox’s assets for $52.4 billion.

Although it looked like a deal, Comcast’s CEO, Brian Roberts (Comcast owns NBCUniversal and DreamWorks Animation) decided he would also make an offer for Fox. Months of negotiations ensued. It was never clear whether Roberts really wanted Fox or was playing a spoiler in Disney’s plans. Nonetheless, Disney was forced to up its offer. It finally acquired Fox for $71.3 billion. It’s hard to not think of Roberts as the guy who made his biggest competitor spend $20 billion more than he planned!

Around the time Disney finalized the deal for FOX, AT&T announced they were acquiring Time-Warner for $85.4 billion. Although there is a fifty-year history that phone companies and entertainment companies don’t mix, the telco wanted to be in the movie business.

Comparing the two deals, Disney got the weaker hand. AT&T got some extraordinary assets which, sadly, it immediately squandered.

For $85 billion, the Time-Warner deal came with two movie studio lots: the main Warner lot is one of the two best in the industry. Time-Warner had the most successful movie and television studio year in and out over the past 40 years and HBO was the crown jewel of the entertainment industry until AT&T neutered it. It also had Turner: one of the strongest players in cable with TNT, TBS that came with great sports—especially basketball (until this year).

Disney, although it spent $14 billion less than AT&T (without Brian Roberts it would have been $34 billion less), didn’t get the Fox movie lot. That still belongs to Murdoch, and Disney spends millions renting space.

Fox’s highly profitable news and sports assets were also not part of the deal. They did get a great film production company but let most of the staff go because of duplication of jobs at Disney. They got a great television studio, and one of the CEOs they inherited is now a leading candidate to succeed Iger. They also got foreign sports properties, many of which they had to sell.

Deadpool was so conscious of being a Fox-turned-Disney movie that many of its inside references were based on being the first R-rated Disney Marvel film. Ryan Reynolds happily made jokes about words and subjects that had never been heard in a Disney film before. He even called out Kevin Feige, the head of Marvel, by name when he used R-rated content.  Deadpool has become the highest grossing R-rated film of all time (passing Joker, another comic book adaptation).

The best part of the deal was acquiring intellectual property, including every episode of The Simpsons, Modern Family, and, as mentioned above, Avatar. Plus (see above) Disney also got Deadpool and Alien, which have performed so well this year. Buried in the sale is a lot of other IP that may see new life (particularly the X-Men franchise, although Deadpool borrowed Wolverine, and the Fantastic Four).

All in all, AT&T got better assets for not a whole lot more. Sadly, making a good deal did nothing because of AT&T’s diffident and inexperienced media leadership. A few short years later, Warner Bros. Discovery is heavily in debt, with very low morale, and little on the horizon except a fire sale or merger.

What it all means

I used to teach as UCLA’s Anderson Business School where I told students that you can count the successful media mergers on one hand, maybe three fingers. They rarely create value, and almost always destroy legacy. That’s why I didn’t think highly of Disney’s acquisition of Fox.

Entertainment is a notoriously tough business in which to make projections more than a year or two in the future. Anyone looking for a major acquisition in 2011 couldn’t have predicted the emergence and dominance of Netflix, nor a pandemic that shut most of the industry down and changed everything.

Big mergers and acquisitions in this industry have a bad track record.

On the other hand, Disney’s acquisition of a majority interest in BAM Tech Media in 2017 for a total of $2.58 billion (followed by the remaining shares in 2022 for $900 million) was a strategic, highly focused and successful investment. Purchased from Major League baseball, BAM Tech powers Disney’s streaming business.

Small, relatively focused investments that meet immediate needs can make great sense—and don’t drain $50-100 billion of a company’s treasury.

It is the big, high-profile acquisitions that focus on the long term that got Matsushita, Coca-Cola, Seagram’s, Vivendi, AT&T and others into trouble. Driven by faulty visions and ego, these high-profile deals rarely work out.

Valuable lessons for today’s incumbents.
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Jeffrey Cole is the founder and director of The Center for the Digital Future at USC Annenberg.

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September 4, 2024