Sony-Columbia Pictures: Lessons from a Cross Border Acquisition

            
 
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Case Details:

Case Code : BSTR119
Case Length : 17 Pages
Period : 1989-2004
Organization : Sony Pictures Entertainment
Pub Date : 2004
Teaching Note :Not Available
Countries : US/Japan
Industry : Media, Entertainment, and Gaming

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"It is a Japanese failure of judgement and an American failure of management." 1

- A Sony investor, commenting on the Sony-Columbia merger.

The Acquisition & Problems

On September 25, 1989, Japanese electronics major Sony2 acquired the US-based Columbia Pictures Entertainment (Columbia), which also included TriStar Pictures, paying $4.8 billion ($3.2 bn in cash and assuming an additional debt of $1.6 bn) for it. Industry analysts felt that the acquisition cost of $27 per share paid by Sony was very high compared to Columbia's share price of $12 at the beginning of 1989. Moreover, Sony paid 22 times more than the company's annual cash flows at the time of acquisition.

Initially, Sony was interested in acquiring a controlling equity stake in Columbia. When the negotiations started, Sony felt that just acquiring a controlling stake would not serve the purpose. Norio Ohga (Ohga), the CEO of Sony at the time of acquisition, believed that Sony's core business - manufacturing video cassette recorders (VCRs) and camcorders had significant synergies with Columbia's movie business. With the acquisition of Columbia, Sony aimed at setting industry standards for the future generation of digital video technology. However, within the next few years, Sony's strategy of buying Columbia, which was renamed Sony Pictures Entertainment (SPE) in 1991, began to seem like a costly mistake. During the first five years of the acquisition, Sony faced many problems in its movie business.

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Though SPE scored some hits such as "Sleepless in Seattle" (1993) and "In the Line of Fire" (1993), most of its big budget films such as "Last Action Hero" (1994) failed miserably at the box-office during that period. Apart from this, escalating costs and attrition at the top management levels added to the problems of Sony's movie business. As a result, in November 1994, Sony had to announce a $2.7 bn write-off of its investments in Columbia, in its quarterly financial report. It also showed an additional $510 million (mn) as operating loss (incurred from Columbia's operations during that quarter) in the financial report.

For the financial year ending March 31, 1995, Sony reported a net loss3 of 293.36 bn4 compared to a net profit of 15.30 bn in the fiscal 1994 (Refer Table I). The write-off and loss came as a shock to Sony's shareholders, and industry analysts anticipated Sony's exit from movie business as it failed to leverage the expected synergies from the acquisition. However, Sony did not quit the movie business. Instead, it reinforced its commitment to succeed in the business through a spate of management changes and business restructuring from the mid-1990s. In the light of this, industry observers waited eagerly to see whether Sony could bust the myth that Japanese companies could not succeed in Hollywood.

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1] "So Many Dreams, So Many Losses," Rudolph, Barbara Allis, TIME, November 28, 1994.

2] Established in May 1946, Sony is a leading global manufacturer of audio, video, communications and IT products. The company invented the video recorder, walkman and mini-disc recorder.

3] Certain investors were angry at Sony's abrupt disclosure of huge losses and said that the company had misguided them by not disclosing the actual performance of the movie business. The financial results of the movie business were clubbed with the highly profitable music business under the heading 'Entertainment.'

4] As on April 22, 2004, 1 US $ = JP 109.266.

 

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