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Disney's shotgun M&A approach

Aug. 03, 2010 1:35 PM ETDIS, FOX-OLD
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This excellent commentary piece in the WSJ questions Disney’s recent string of acquisitions, culminating in the $563 million purchase of Playdom announced last week. As we wrote here, we continue to believe Disney’s acquisitions are an expensive defense strategy of acquiring new media platforms that could quickly upset traditional cash flow streams that media conglomerates like Disney rely upon.

On accretion/dilution basis of pro forma earnings, as well as an analysis of stock price appreciation before and after transaction, Disney’s acquisition of Pixar, Marvel and most likely Playdom will not justify these acquisitions. In fact, in the aggregate, all corporate M&A transactions show a net loss based on these metrics alone. However it is difficult to use these indicators as a sole measure of whether a M&A transaction is successful or not. We may know what a company’s performance looks like before and after a transaction, but we have no way of knowing what a company’s performance would have looked like had the transaction not occurred. There are many corporate transactions that occur as a way of avoiding an even worse fate than price dilution, including quick obsolescence from an industry.

Having said that, Disney is no Rupert Murdoch. Disney’s M&A strategy is akin to blasting a large shotgun to kill a fly: if there’s a threat on the horizon, Disney will pay a premium to acquire it. On the other hand Rupert Murdoch’s strategy of buying MySpace, for example, was a textbook example of the value-investing play: before he even made a bid he probably knew how much advertising revenue he could generate post-purchase. He knew how much MySpace was worth because he knew how much he could earn from it. See our commentary on that deal here.

In the end, however, we must respect the market’s judgement as the final arbiter of Disney’s on-going strategy. As the WSJ article points out, Disney continues to trade at 17x earnings, a premium compared to its competitors including Fox. Perhaps its shotgun approach is what helps Disney maintain one of the the strongests brand in corporate history.



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