Prime Focus/Dneg, Technicolor/Mr.X- Why do companies merge?

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With today’s news of the Prime Focus/DNeg merger, and Technicolor’s acquisition of Mr X two week ago, it might be a good time to examine why companies merge and acquire one another. What are the benefits? Why do they do it? These are important questions that artists should ask themselves so they are better informed about the changing landscape of employment.

When it comes to takeovers, you will hear the term synergy often. The definition of synergy is: the interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects.

When a merger or acquisition (M&A) takes place, there are three possible different synergies, operational, financial and managerial. Let’s look at how some of these play out.

Diversification/sharpening of focus

By acquiring other companies, companies can spread out their income sources, reducing risk in a volatile market. They can also buy their way into new markets. For example, Mr.X has developed a reputation for high end TV shows and co-financed independent films. Technicolor already has a very solid presence in the major studio blockbuster area (they own MPC), but buying Mr.X allows them to easily move into this new area.

Prime Focus has a very large 3d conversion studio, while DNeg has none.

Improved financing

The larger business often has better access to credit and money than the smaller business. Banks will treat companies (and people) differently. Someone who is in debt will be treated much differently than a millionaire. Let’s pretend that Company A is right on the edge of bankruptcy. They may have to pay a very high interest rate on any money they have borrowed. Company B is flush with cash. They may be able to borrow money at a greatly reduced rate, making it easier to turn a profit.

I don’t know the financials of Mr.X but DNeg, Prime Focus and Technicolor’s financials are a matter of public record. I would imagine that Mr.X being owned by Technicolor, a much larger company, would change their relationship with their bank for the better.

Tax advantages

“There are tax advantages associated with mergers; specifically, a ‘tax loss carry forward’. If one of the firms involved in the merger has previously sustained net losses, those losses can be offset against the profits of the firm that it has merged with, a significant benefit to the newly merged entity.” (Taken from here)

Operating economies (removal of duplication)

Commonly areas like accounting, purchasing, marketing and sometimes R&D get fired when companies merge. This is often called ‘reducing redundancy’ or ‘finding efficiencies’. For example, Prime Focus recently closed their London office, why have a FX division in London when DNeg is across the street?

I don’t mean to scare anyone in Toronto. If you read the Dennis Berardi/Tim Sarnoff interview, it says:

Sarnoff told StudioDaily that none of Mr. X’s more than 200 jobs in Toronto and New York are expected to be lost, with both offices remaining open and in growth mode. “The head count remains the same,” he said, “and we intend to grow that head count.”

Economies of scale

“Economies of scale simply means that the cost of doing business, whether in manufacturing or the aforementioned operating economies, will be lower in the combined business firm.” (Taken from here)

Growth

“Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves - instead, they buy a competitor’s business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers.” (Taken from here)

I would guess that this is the case with Technicolor and MrX. In their interview, The article states:

The acquisition came about, according to Sarnoff, because Mr. X was already involved in markets where Technicolor sought a broader presence. “Mr. X is a fabulous brand and a great studio with Dennis in charge that has been working directly in the spaces that Technicolor has been interested in — co-financing independent films and TV product — and their presence in Toronto was also of interest,” Sarnoff said. “Technicolor has a good relationship with those types of producers and directors in our post space, and this will give our clients a more rounded experience, including the opportunity to work with us on visual effects.”

Eliminate competition

Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product’s market. (Taken from here)

According to the press release, DNeg and Prime Focus’s VFX entity will be known as Double Negative, and they’ll be opening a facility in Vancouver. On VFX Soldier’s blog, commenter Jim O’Hagan writes

Jim O’Hagan says:

June 25, 2014 at 3:02 am

"Well, apparently, it’s true. I stand corrected. Dneg has merged with Prime Focus World. My internal sources were as surprised as I am. Dneg is visual effects and Prime Focus World is stereo conversion under the umbrella of PFW corporate. Dneg Van will open in the same building as PFW, but will not share office space – considered separate companies. We’re told that Dneg will retain financial and creative control over itself, meaning nothing should change day-to-day. No word on migration between the companies.”

So what does this all mean? It seems as though we are in an age where the big VFX companies are getting bigger. I would think that this will put pressure on medium sized companies the most. Historically it’s not the best place to be when you’re too big to be small and too small to be big.

Would you believe that just as I was writing this, news broke that Autodesk has acquired Shotgun? FX Guide has all the details in an excellent article (as usual). I’m sure that this will be an excellent move for Shotgun, just ask all those happy Softimage users.

Keep in mind that I’m no business major, I’m a compositor who has never taken a business class in my life. I just read a lot and talk too much. If you have a different take on this, please leave a comment in the box below.

Update: 12:42pm June 25.

David Cohen has an update on Variety that talks about the merger.