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Why Disney needs Steve Jobs and Pixar
By buying Pixar, Disney could restore magic to its moribund animation studio and put the country's hottest CEO on its board.
By Robert Walberg
If you cant beat 'em, buy 'em.
Okay, so it doesnt have the same charm as, When you wish upon a star, but if you are Walt Disney (DIS, news, msgs) and you havent produced a hit animated movie in years, then its time to stop wishing and start acting. Acquiring Pixar (PIXR, news, msgs) would be a very bold act indeed.
According to The Wall Street Journal, Disney is in serious discussions with Pixar about a potential buyout in the neighborhood of $7.0 billion. Thats a very nice neighborhood -- especially if you are Steve Jobs, Pixars CEO and majority shareholder. If the price paid for Pixar is even close to the reported figure, Jobs will be cashing in on Pixars string of successful movies to the tune of about $3.5 billion.
But enough about Jobs, for now. Lets take a look at Disney's motives and try to determine if the entertainment giant is making a good decision or a rash one. While Disney derived nearly half of its fiscal-year 2005 revenue of $31.9 billion from its media networks and consumer products divisions, the company remains best known for its theme parks and its movies -- especially its animated movies.
Animation stagnation
There's the problem. Disney animation hasnt turned out a major hit since Tarzan in 1999. Frankly, its concepts and technology are dated, and with increasing competition from Pixar and DreamWorks Animation SKG (DWA, news, msgs) the company is struggling to produce films that resonate with todays audience.
So if you are an entertainment company founded on the strength of your animation and you havent produced an animated hit in years, its time to consider some new options. With Disney and Pixar having enjoyed a successful and longstanding distribution partnership, it's no surprise that buying Pixar was option No. 1.
But the single best reason for Disney to buy Pixar is that the latter is the king of todays animated film world. Since releasing "Toy Story" a decade ago, Pixar has created one mega-hit after another. Its titles include, "A Bugs Life," "Monsters Inc.," "Toy Story 2," "Finding Nemo" and "The Incredibles." The company hasnt missed yet, and if previews of this summers "Cars" are any indication, the string will remain intact.
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Of course, the question for investors is if Pixar agrees to be bought by Disney, will its creative energy be stifled or altered. Disney tried to pressure Pixar into adding musical numbers to Toy Story years ago, to make the movie more Disney-like. Pixar refused to compromise its vision then, but will it be able to do so if it actually becomes a part of Disney?
Disney's management would be smart to stand back and let Pixar's creative teams crank out the hits. Unfortunately, big companies often want to tell the smaller companies they acquire how to do things. If Disney thinks it knows animation better than Pixar, its executives might want to try sitting through the poorly reviewed "Chicken Little," and think again.
A board seat for Mr. Incredible
There are two more reasons why it makes sense for Disney to buy Pixar. First, it will be able to continue merchandising all the characters. Having just returned from a week in Disneyland with my family over the holidays, I can tell you firsthand how excited my kids were to meet the characters from "Monsters Inc." and "The Incredibles." They also loved the Buzz Lightyear ride.
Developing the merchandise around the Pixar characters for years to come and turning them into this generations Mickey and Donald could generate big profits for years to come. Nobody does animation better today than Pixar, and nobody has done better over the years at merchandising than Disney. From that standpoint, its a marriage made in heaven.
Also heavenly, at least from a Disney shareholder perspective, is the possibility of having Steve Jobs as a top shareholder and active board member. Combine his success at Pixar with his stunning turnaround of Apple (AAPL, news, msgs), and there isnt a hotter CEO in the country. Certainly, no CEO has done done a better job of visualizing and then realizing how technology would transform entertainment.
Adding the stature of a Steve Jobs to the board of Disney is almost worth the purchase price alone. Now, about that purchase price. At roughly 20 times sales, Pixar isnt a bargain. But when you consider that Disney sits on about $1.7 billion in cash and that it generated $2.4 billion in free cash flow last year, the question isnt whether Disney can afford to buy Pixar, but whether it can afford not to.
The Walt Disney Co. remains a Street Patrol portfolio holding.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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