On Disney's Pixar Acquisition: Pricey, But Worth It

| About: The Walt (DIS)
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One of the Eight Best Investing Blogs, Cheap Stocks, has posted the second part of its look at Disney (NYSE:DIS).

Another one of the eight best investing blogs, 24/7 Wall St., has a new post entitled "Disney's Pixar Purchase: Never Give a Sucker an Even Break." The post mentions that this weekend's estimated $47.2 million opening for Disney/Pixar's "Ratatouille" was the worst Pixar opening in nine years.


Regardless, Ratatouille was number one at the box office despite tough competition from films such as Live Free or Die Hard and Evan Almighty – well, not exactly tough competition in the latter case as Evan Almighty has been a big financial disappointment.

You could see it coming. If you look at any list of top grossing movies (adjusted for inflation) comedies don't do particularly well, especially considering how many get produced. The recipe for a huge money maker is simple – and goes back to long before the beginning of movies – make it epic, make it exciting, make it fantastical or historical (just don't make it commonplace), and make it for all ages. Most comedies don't score well on those counts. I suppose Evan Almighty does better than most comedies in aping the epic dramas that work. In fact, it matched them a bit too well with a price tag around $175 million.

Why have I spent a full paragraph on Evan Almighty when I'm supposed to be writing about Disney, Pixar, and Ratatouille? Because price matters. Here's some of what 24/7 Wall St. had to say about Disney's acquisition of Pixar:

It would appear that Jobs sold at the top. It would also appear that Disney got a lousy deal. It's their own fault. Jobs was able to get more for the company than it was worth. The markets have learned not to underestimate him…But, Disney got burned.

I'm sticking with that I wrote about a year and a half ago:

Is Pixar worth $7 billion (or whatever the offer ends up being)? That’s a complicated question. First of all, you have to ask if $7 billion of Disney’s stock at today’s market price is actually worth more or less than $7 billion. What’s the chance that Disney’s stock is currently undervalued and Pixar’s is currently overvalued? It’s a real possibility.

On the plus side, this could mean Disney CEO Robert Iger wants to take Disney in a different direction from what we’ve seen lately. I’ve always thought the real value at Disney would come from providing content not distributing it. If the company really wants to be some sort of “diversified entertainment company” wouldn’t a company built around kids make more sense?

A company focused on animation, theme parks, the Disney Channel, etc. would make more sense to me. In fact, a few years ago, I would have been very happy if Disney announced an acquisition of a toy maker, video game publisher, or licensing company that had something to do with entertaining kids. Today, a lot of Disney’s business isn’t in places where Disney’s powerful kid oriented properties can be leveraged.

Pixar fits into the kind of company I’d like to see Disney become, but that doesn’t necessarily mean acquiring Pixar is a good move for Disney. After all, Fox Family fit into the kind of company I’d like to see Disney become, but when Eisner decided to buy Fox Family and rebrand it as ABC Family, I thought it made no sense (especially at the price he paid). We’ll have to wait for details on the acquisition, but it’s hard to believe Disney is getting much of a bargain here. Still, it’s a step in the right direction.

I probably focused on age a bit too much in that post. The age of your audience isn't what matters. It's the quality of your content. For instance, I included "video game publisher" among the list of properties that would make more sense for Disney to acquire than more generic distribution properties in the entertainment business. Video game publishers don't make the list because they cater to kids – in fact, they don't really cater to kids. But, they do live and die on content. That content tends to have a much longer shelf-life than the much less financially fattening stuff you see on network television.

Pixar provides Disney with the opportunity to get back to creating and caring for evergreen intellectual property. That's a good business. It's always been a good business and it always will be a good business. It's also a business that isn't going to change as much as the distribution side of entertainment, which may or may not be a good business – but, certainly will be a different business a few years down the road.

Pixar was expensive. But, as much as it pains me to say this (being as focused on price as I usually am), if it helps convert them to content zealots over at Disney it will be worth it for long-term shareholders. Disney can be an international superstar in the content business. It can never be more than an also ran in the distribution business, because in that business you can't think up a $100 million idea, care and nurture it into a $1 billion idea over many years, and still have something left over. In the distribution business, you generally pay full price for what you get.

There's a lot of talk about advantages of scale in business. Some of it is true. Most of it is utter nonsense. Content gives you the best advantages of scale, because you can show the world a good idea. Anyone can think up a good idea – that doesn't really increase with size, but the ability to take that good idea and bring it to the fertile soils of an audience's minds – that's something that does grow with the size of your enterprise.

I don't know how Ratatouille will do. But, I do know that it's unlikely it would do any better anywhere else. There's not a lot of products or properties about which you could say the same.

Having said all that, there's no denying Pixar was a pricey acquisition for Disney.

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