Comparing Dreamworks to Disney's Pixar acquisition

Following up on my last post on Dreamworks, I went back in time and started doing some investigation of Pixar and Disney’s acquisition of them.

Now, I don’t think Dreamworks is as valuable as Pixar. I think Pixar’s movies have a bigger emotional appeal, and Disney really needed Pixar’s talent to re-infuse their own movie studio (there’s an excellent discussion of how much Disney needed Pixar in Steve Jobs biography).

But, at the same time, Dreamworks has some advantage Pixar didn’t.

1. Pixar was much smaller at the time of the acquisition, with just six films in their library (see their 10-K).
2. Pixar’s movies were always branded “Disney Pixar”. It would have been strange to lose that if/when the two split.
3. Disney’s distribution agreement w/ Pixar was much more all encompassing than Dreamwork. Disney basically got a cut of everything, and split ownership of the characters and ip that stemmed from movies (except Disney fully owned the Toy Story rights) and Disney owned / controlled the rights to sequels (with Pixar having small options to co-invest).

So, while Pixar had a ton of value from their small film library, and the two (Disney and Pixar0 clearly needed each other, Dreamworks is probably in a better standalone position than Pixar ever was.

All that said, here’s the press release announcing the acquisition (you can also see the slides, but I don’t think they add anything). Note the valuation- $6.3B EV. Remember, Pixar had just six movies in their library, plus two pending releases (Cars and Ratatouille).

So here are some other things I found interesting

This interview right after the acquisition was announced. Two things stand out.

1. Disney had distributed 6 Pixar films that had grossed more than $3b. They paid twice that to buy Pixar (it also worked out to 32x EBITDA).
2. This exchange

Elizabeth Vargas – Bob you are spending $7.4 billion dollars as we said, to acquire Pixar. That’s more than a lot of people had speculated Disney would spend. Is it a good deal for Disney?

Bob Iger – It is a good deal for Disney because making great content is the most important thing we can do as a company and making great feature animation is incredibly important. If you look at the history of the company during the periods of time that we have been at the top of our game in feature animation, the company has really flourished, and it’s incredibly important for us to return to those days. As I considered all the different options of how to do that, I realized that, first of all, you need great people to do that, but then you have to find them, and I found them in Pixar. In a way they were kind of right before our eyes since we have had this partnership over time and while you know there are always complexities and risks associated with any acquisition, I felt that they were all worth taking given how important this business is to the company and given how enormously talented these people at Pixar are. Just look at their success rate and consider what they can continue to do and you conclude that this is a great thing for the shareholders of The Walt Disney Company.

Combine that interview with this quote from their CFO on the conference call announcing the acquisition

But you asked about the synergy piece. I’m not going to allocate the synergies specifically to different buckets, but I think you should assume that we feel that the lift creatively and across the rest of the business units from this acquisition is a very important part of the equation for us.

I think that just continues to show that companies place a very, very high premium on controlling not just the intellectual properties these firms create, but also the intellectual capital (the people who create the properties).

There’ve also been a lot of comments questioning the value of the movies. Check out this interview from Disney’s CEO announcing the deal. Specifically,

When you think about these products, when you talk about them as films, they are not really just films. Cinderella is a great example. We released a DVD of Cinderella this past fall. It’s a 55-year-old movie and we’re on course to sell over 10 million DVDs – and it’s worldwide. You can buy Cinderella costumes at Wal-Mart and go to Cinderella Experiences at our parks and go to our castles and read Cinderella books and play Cinderella video games. And so thinking about these things – when they are right, I think just thinking of them as movies is very narrow minded.

And what Pixar has managed to do is to create five great franchises, and it is on course to create many more and that is why we (indiscernible) of the Company.

It’s been over ten years… and Shrek is still enjoying runs on pay TV. Does it having the staying power of Cinderalla? No, probably not… but it still has long lasting appeal. And that long lasting appeal carries very, very high margins.

That interview also contains quotes talking about the opportunities for Disney to monetize Pixar’s characters in a way Pixar couldn’t. There are simply synergies that a global media behemoth can take advantage of when pushing characters through. The same thing would apply to a Dreamworks and (insert any major media company you want here).

So, again, I don’t think Dreamworks is as good a company as Pixar. I don’t think they’re in play. But I don’t think either of those two matter at today’s price: Dreamworks is trading way below what I think they could literally run the business off for, they have huge opportunities for growth, and if they were put up for sale, I think you’d have a variety of parties willing to offer well in excess of today’s share price for the company.

Disclosure: Long DWA