TOKYO DISNEYLAND AND THE
DISNEYSEA PARK:
Corporate Governance and Differences in Capital Budgeting
Concepts and Methods Between American and Japanese
Companies
Alvaro Fernandez
Yizhen Liu
Daniel Mejia
Yitian Xue
AGENDA
•Oriental Land Corp. and Tokyo Disneyland
•Negotiation with The Walt Disney Company
•Position of OL’s various stakeholders
•The new capital investment – DisneySea Park
•Financial assumptions
•Capital budgeting methods (NPV, IRR, AAR, ACFR)
•Differences in American and Japanese cultures
•Selection of capital budgeting techniques
•Post Script
THE ORIGINAL TOKYO DISNEYLAND
•April 1979  Oriental Land Corp. (OL) signed
a license agreement with WD. 10% on
admission fees and 5% on food beverages and
novelty goods.
•December 1980  The construction of Tokyo
Disneyland began in Maihama District
•April 1983  Tokyo Disneyland opened its
doors for business
Fernandez
Mejia
Liu
Xue
THE COMPETITOR
• The Mitsubishi Estate Group. (foothills of Mt.
Fuji).
• They offered WD 2450 acres in exchange
for WD constructing Disneyland.
• No agreement. MEG didn’t like the
conditions.
“Wanted the royalties but wanted to pay
nothing”
• OL accepted the condition knowing that it
would be hard for them to overcome.
Fernandez
Mejia
Liu
Xue
TOKYO DISNEYLAND STATISTICS
•The number of visitors never went
below 10 million per year. They
reached a peak in 1998 with 17.45
million.
•75% of the attendance was from
repeated visitors.
•70% of the park’s visitors were from
neighborhoods around Tokyo.
•7000 ¥ ($59.31 US) as the estimated
average of expenses per visitor.
Fernandez
Mejia
Liu
Xue
THE ISSUE
Most of the customers were repeat visitors. However, while customers were expected
to return two or three times, it was not clear if they would come back for a forth visit.
Alternative:
OL received an inquiry from their licenser, to consider the idea of constructing a new
entertainment park, The DisneySea Park Project.
Fernandez
Mejia
Liu
Xue
FEATURES OF THE NEGOTIATION
OL would pay WD a licensing fee for the continuous use of the name “Disney”, WD would
provide OL with valuable technical advice and management support for the new project.
Tokyo Disneyland had to make a big decision since WD was proved as a tough negotiator. OL
company also has a number od stakeholders that they had to please.
Stakeholders: The parent company, the main bank, landlords and shareholders.
Fernandez
Mejia
Liu
Xue
POSITION OF VARIOUS STAKEHOLDERS
The mitsui real estate group:
Owned 20.48% of OL’s shares.
Problems for them:
1)
Long period of time
2)
Very high licensing fees
3)
No risk sharing
Fernandez
Landlord: The Chiba government office perceived
an exaggerated request for land from OL’s
shareholders (Keisei electric railway co and IBJ). 1
million Tsubo (816.88 acres).
Eventually OL got 750.000 Tsubo. (612.66 acres)
later on, in 1988, the Chiba prefecture requested
the use of unused park land of 300.000 Tsubo.
(245.06)
Mejia
Liu
Xue
POSITION OF VARIOUS STAKEHOLDERS
The Main Bank: Tokyo Disneyland was financed by a group of 22 banks. Headed by the IBJ.
•The position of WD of taking no risk, just collecting the fee caused a lot of commotion amongst
Japanese banks .
•However, the IBJ shifted its lending targets and was quite willing to lend to OL.
•They decided to lend ¥65 billion ($0.55 billion) to OL in August 1879
•When the Disneysea park was being discussed total bank loans were ¥195 billion ($1.65
billion)
Fernandez
Mejia
Liu
Xue
THE NEW CAPITAL INVESTMENT –
DISNEYSEA PARK (1997)
Initial investment: ¥400 billion ($3.4 billion)
Company’s total Assets: ¥355.18 billion ($1.77 billion)
EBIT: ¥28.32 billion ($0.24 billion)
OL senior management wanted to know how long it would take for the Disneysea
park to start generating profits, and also if the company’s current profit earning
capability would be able to sustain the investment period, assuming construction
would start in 2000.
Fernandez
Mejia
Liu
Xue
TOUGH NEGOTIATION
• WD wanted to maximize revenue from Japan with the
licensing fees.
•The two companies could not agree.
•The relationship was unharmonious.
•OL’s top management went to the USA (August 1997)
OL’s
top
management
strongly opposed to the
licensing fee format for the
second park.
•“Mr. Chairman, our president is furious. There is no
point in any discussions. We have to ask you to go back
to Tokyo”. –WD spokesman –
Fernandez
Mejia
Liu
Xue
FINANCIAL ASSUMPTIONS
• Initial investment of ¥400 billion (us$3.4 billion) in 2000
Number of visitors increase
Admission fees increase
Admission fees
1997
1998
1999
2000
2001
2002
2003
2004
0
0
0
0
0
0.3
0.1
0.1
0
0.02
0.02
0.02
0.02
0.15
0.1
0.1
$ 88.30 $ 90.07 $ 91.87 $ 93.70 $ 95.58 $ 109.92 $ 120.91 $ 133.00 US dollars
These would be the proportional values of each years level of sales
•
•
•
•
•
•
•
Operating costs other than depreciation = 67% of sales
Administrative expenses = 7%
Other expenses = 4%
Depreciation will be conducted using the straight-line method. (20 years)
Borrowing interest rate= 4.34%
2/3 of the investment would be financed by the internal reserves. 1?3 by borrowings.
Japanese taxation = 43%
THE CAPITAL BUDGETING EXERCISE
•American NPV
•American IRR
•Japanese AAR (Average Accounting Return)
 Common method of evaluating capital investment projects in Japan
 Pros: fits into Japanese management; easy to understand
 Cons: does not consider time value of money; depreciation not added
•IBJ ACFR (Average Cash Flow Return)
 Compromise between US and Japanese methods
Fernandez
Mejia
Liu
Xue
CASH FLOWS OF THE NEW PROJECT
•New Project would be an expansion of the existing company
•Hard to separate the expanding project from the existing company
•Difference between projections of cash flow with the project and without the project
Fernandez
Mejia
Liu
Xue
PROJECTIONS OF CASH FLOW WITH THE PROJECT
Fernandez
Mejia
Liu
Xue
PROJECTIONS OF CASH FLOW WITHOUT THE PROJECT
Fernandez
Mejia
Liu
Xue
CASH FLOWS OF THE NEW PROJECT
•New Project would be an expansion of the existing company
•Hard to separate the expanding project from the existing company
•Difference between projections of cash flow with the project and without the project
Fernandez
Mejia
Liu
Xue
CALCULATE NPV
•Initial investment – 3,400 million
•Cost of capital – 5.56%
•Terminal value – cash flow of the fifth year/discount rate
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Mejia
Liu
Xue
CALCULATE IRR
Fernandez
Mejia
Liu
Xue
CALCULATE ARR
Average Accounting Return=Average Net Income/Average Investment
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Mejia
Liu
Xue
REJECT? ACCEPT?
Based on NPV – Yes
 Positive NPV
Based on IRR – Yes
 IRR 8.45% > Hurdle rate 5.65%
Based on ARR – No
 Negative return
Fernandez
Mejia
Liu
Xue
WHY DIFFERENT RESULTS?
•NPV and IRR are essentially the same technique
• Same result
•Average Accounting Return
 Did not add depreciation
 Does not consider cash flow occurring after the operation period
 Does not pay attention to the salvage value
Fernandez
Mejia
Liu
Xue
CALCULATE ACFR
Average Cash Flow + BV of Fixed Assets at the end of Project
Average Cash Flow Return =
Fernandez
Mejia
Initial Investment
Liu
Xue
DIFFERENCES IN CORPORATE GOVERNANCE
• Firm’s objective
Maximizing shareholder
wealth
Anglo-American
• Firm’s objective
Maximize corporate
wealth
Japanese
• Principal-agent relationship
Positive/negative
incentives to get agent
on the same line
• Principal-agent relationship
Far more complex;
principles
themselves can have
different goals
• Value maximization
Short-term; meet market
expectations
• Value maximization
long-term
stakeholder wealth
maximization
Fernandez
Mejia
Liu
Xue
OUR OPINION
NPV
Advantages:
• “Cash flow” is used
• The time value of money is accounted for by
discounting cash flow
• It holds true with US corporate governance
NPV?
or
AAR, ACFR
Disadvantages:
• It does not take into account the matter of
timing
• DCF is not used
• It ignores all cash flow occurring after the
operation period
• Depreciation is not added to the refunding
resources.
AAR?
or
ACFR?
Fernandez
Mejia
Liu
Xue
OUR OPINION
New Project ?
Fernandez
Mejia
Liu
Xue
OUR OPINION
• NPV and IRR fulfilled the threshold
• Cash flow with the project is higher than the cash flow without the project and net
income with the project will be increased up to 240.9 million in 2004
• Tokyo Disney Sea Park can also create huge employment opportunity
POST SCRIPT
•DisneySea Park was opened on September 4th, 2001.
•Most expensive theme park ever built.
•Fastest theme park in the world to reach the milestone of 10 million guests.
•Attracted an estimated 14 million visitors in 2013, fourth-most-visited theme park in
the world.
•Tokyo Disneyland and Tokyo DisneySea are the only Disney parks in the world not
owned by the Walt Disney Company.
Fernandez
Mejia
Liu
Xue
THANKS FOR WATCHING