Disney Digging DreamWorks?

By Rick Aristotle Munarriz

Is Disney (NYSE: DIS), soon to be dissed by Pixar (Nasdaq: PIXR), looking to make a play for DreamWorks Animation (NYSE: DWA) on the rebound? A Business Week column is suggesting as much, but — sorry — I just don’t see that happening.

First, let’s go over why the proposed pairing is even possible. As skeptical as I am of a deal coming to fruition, there is some sound logic behind the thought process. Disney CEO Michael Eisner and DreamWorks Animation chief Jeffrey Katzenberg are sworn enemies. After Katzenberg helped revive Disney’s animation studio through the 1990s, he figured he would be the logical choice to be promoted to president at Disney after Frank Wells passed away. Eisner chose his friend Michael Ovitz instead. It was perhaps the most critical mistake during Eisner’s tenure. Ovitz leapt from the company a year later with a gaudy golden parachute, while Katzenberg left and made Disney pay dearly by teaming up with David Geffen and Steven Spielberg to form DreamWorks SKG.

How big a mistake was this on Eisner’s part? While folks love to point to the tens of millions that the company had to shell out to Ovitz as he fled and Katzenberg as he sued, I prefer to point to DreamWorks Animation’s $4.2 billion market cap. That’s what the market thinks a studio headed by Katzenberg is worth, and that’s what Disney gave up the day Eisner failed to promote Katzenberg.

Now that Eisner — or, as Katzenberg would say, Lord Farquaad — will be relinquishing the throne, a host of possibilities opens up. Old flames die hard. Deep down, Katzenberg may still covet the presidency at the family entertainment giant, and incoming chieftain Bob Iger could hand him that title if a favorable deal were struck. It certainly helps that Iger and Katzenberg are friends.

But DreamWorks won’t go cheap. After a stellar year with Shark Tale scoring well at the box office while Shrek 2 DVDs sold briskly, making it the highest-grossing domestic animated feature film of all time, the company is trading at roughly 10 times trailing earnings. Profits are likely to dip until Shrek 3 is released, but you still have to think that DreamWorks won’t sell itself for anything less than $6 billion — and even more if Madagascar becomes another winning franchise come May.

Besides, Disney has its own reasons to wait, beyond the fact that it will be months before Iger is officially named CEO. Disney has struck deals with two smaller computer-animation studios, and with November’s release of Chicken Little, we will know how it’s holding up on its own without Pixar or DreamWorks.

Now that Fox (NYSE: FOX) has fared so well with Robots this month, one can’t even argue that acquiring DreamWorks — or even Pixar — would help Disney control theatrical animation again. Those days are over. There are too many skilled studios toiling away in the art of art these days.

Iger will need to take bold steps to set himself apart from Eisner’s mold while repairing the many frayed relationships that Eisner will be leaving behind. Acquiring DreamWorks Animation would certainly help to accomplish that, but can Disney afford a buyout? I don’t think so. Can a collaborative deal be struck? That is also unlikely. Both DreamWorks Animation and Pixar are successful and established, so it’s not as if they need Disney’s mentoring. The box office indicates that if any mentoring is required, it would be the other way around.

That’s why Iger’s first move should be reversing one of Eisner’s last ones. Eisner all but dismantled Disney’s in-house animation studio. Yet DreamWorks Animation and Pixar combine for nearly $10 billion in market cap these days, so there’s money to be made if you do it right. That means a commitment to rebuilding the only brand that used to matter in feature animation. Iger will need to act quickly on that front. Focus on crafting original inked films that will become instant classics before the company’s brainless wave of direct-to-video sequels dries up that last diluted drop of integrity that Disney once had by the bucketful.

Some recent DreamWorks articles worth reading over and ogre:

DreamWorks Animation really did have an amazing fiscal year.
Shrek has been really good for DreamWorks Animation.
Still, the market may have become too crowded for its own good.
Longtime Fool contributor Rick Munarriz loves good buyout speculation, if only for entertainment purposes. He owns shares of Pixar and Disney. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow’s ultimate growth stocks a day early.

Mr. DAPs

Mr. DAPs

Founder at DAPs Magic
Mr. DAPs is the founder of DAPs Magic continues to run its day to day operations. He can be regularly found at Disneyland donning his hat and bow tie as he takes pictures and enjoys the Happiest Place on Earth. He is also a host on Geeks Corner - the Webshow and anchors news stories for DAPs Magic's YouTube channel. You can also find him posting regularly on Twitter and Instagram. He'd love to connect with you so make sure and say hi!
Mr. DAPs

Mr. DAPs

Mr. DAPs is the founder of DAPs Magic continues to run its day to day operations. He can be regularly found at Disneyland donning his hat and bow tie as he takes pictures and enjoys the Happiest Place on Earth. He is also a host on Geeks Corner - the Webshow and anchors news stories for DAPs Magic's YouTube channel. You can also find him posting regularly on Twitter and Instagram. He'd love to connect with you so make sure and say hi!

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