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allenwlee
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Worked at a $5 billion multi-strategy hedge fund making opportunistic loans to entertainment investors. Worked at a film studio and at an independent film distributor in corporate development. Started career in investment banking.
My blog:
Hollywood & Wall.
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  • Disney's shotgun M&A approach
    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.



    Disclosure: No positions
    Aug 03 1:35 PM | Link | Comment!
  • Activision/Blizzard's release of Starcraft II may disappoint
    Tomorrow the much anticipated release of Activision/Blizzard's Starcraft II may be anticlimactic to the enormous success of the first Starcraft in 1998, in which 5 million units were sold (this, in a country with a population of 49 million).  To put that in perspective, that would be akin to around 30 million units sold in the United States.  Comparable entertainment products in the US would be Michael Jackson's Thriller album (30 million sold in the US to date) or To Kill a Mockingbird (30 million sales to date worldwide).  In other words, Starcraft in Korea is not just a bestselling videogame but a cultural phenomenon and milestone.

    It's a milestone in that we can measure how far the Korean gaming industry, and by comparison, the worldwide gaming industry, has traveled in roughly a decade.  In 1998, Korea had just rolled out its now famous national Internet backbone.  This coincided with the release of Starcraft.  The result was a snowball effect.  In rapid succession, Starcraft launched a nation of massive, multi-player, online role-playing game (MMORPG) addicts and with it a slew of professional game playing leagues and the media to cover it.

    Starcraft also helped launch that country's homegrown interactive entertainment industry--one which revolved around online gaming.  Game developer and publishers NCSoft, Nexon and NHN are now publicly-listed, billion dollar plus companies with significant overseas operations, including in China and the US.

    In fact, the Korean domestic gaming market is so successful that many feel it has become over-saturated with an incessant amount of games in development, beta and release stages.  Thus Starcraft II, launching barely 12 years later, is facing a radically different market in Korea.  This is no small issue for Activision, since nearly half of their sales for the first Starcraft came from Korea.

    Things have also changed in the US.  Starcraft I was released by the independently-run Blizzard Entertainment.  Now it's part of the Activision empire created by Bobby Kotick.  The motion picture business is holding steady at $60 billion; the interactive business, at around $30 billion, will surpass that 3-7 years from now.  How much of that will come from online gaming, consoles or social networking games is the real question.


    Disclosure: No positions
    Jul 26 1:06 PM | Link | Comment!
  • Disney / Playdom another hedge play?
    Disney's recent move to buy Playdom for a $500 million valuation (roughly 10x LTM revenue) is the latest sign that social networking games represent the future of the US casual interactive entertainment market.

    Not long ago, one question was whether the US would follow the Korean market, which made use of that country's government-provided national broadband backbone by creating massive multi-player online role playing games played via desktop PCs.  The prognosticators were thinking purely in terms of bandwidth:  surely, console games are in danger as the US' broadband adoption increases in size.  Why wouldn't consumers move towards online PC games?

    Facebook has made all these questions moot.  Certainly, the console market in the US remains strong, especially for hardcore gamers.  Maybe it is this market that is in danger of being eroded by MMORPGs, a la Korea.  But the huge pent-up demand by casual gamers has been released by the social networking platform Facebook, and now everyone is scrambling to get a piece of the action.

    This is not to say that Disney didn't "overpay", as we say in average investor's terms.  Large media conglomerates are incentivized to acquire emerging technology platforms, sometimes merely as a hedging instrument.  Isn't that what Hulu essentially is?  Thus your purchase price may not be related to your standard accretion/dilution model.  Chalk it up to that old catch-all line item, Goodwill.  The question isn't, how accretive is an acquisition of Playdom?  It's more, how damaging will Playdom be to our existing business if we don't own it?

    Another example was in the late 90s when the five largest studios banded together to form Movielink, a VOD company.  There was tons of capital invested in the project, the company officially launched in 2002, went nowhere, then was sold at a firesale to Blockbuster in 2007. 

    Disney itself bought Infoseek to create the Go Network back in the 1990s.  That also went nowhere.  But Disney still remains the formidable corporation that it always was.  When you have deep pockets, buying an emerging technology platform at a huge multiple, whether it is ultimately justified or not, makes good business sense.




    Disclosure: No positions
    Jul 25 1:39 PM | Link | Comment!
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