Mouse ears for Steve Jobs?
Investors hope that a Disney-Pixar deal would mean a big role for Steve Jobs at the House of Mouse.
By Paul R. La Monica, senior writer

NEW YORK ( The Mickey Mouse Club may soon have a prominent new member...and Walt Disney investors couldn't be more delighted.

According to a report in Thursday's Wall Street Journal, Disney is in serious talks to buy Pixar, the animated studio led by Apple founder Steve Jobs.

If Disney bought Pixar, Steve Jobs would become the media giant's largest individual shareholder.
If Disney bought Pixar, Steve Jobs would become the media giant's largest individual shareholder.
Jobs' Magic Kingdom: Investors must be hoping that Disney shares could do as well as Apple and Pixar if Jobs becomes a Disney board member.
Jobs' Magic Kingdom: Investors must be hoping that Disney shares could do as well as Apple and Pixar if Jobs becomes a Disney board member.

If a deal is done, Jobs would become the biggest individual shareholder of Disney and could even snag a board seat at the House of Mouse, the report said.

This news sent shares of Disney (Research) up more than 3 percent on Thursday, a curious move since shares of companies rumored to be making a purchase usually fall on merger-related speculation.

"Clearly the market is giving this a thumb's up," said David Katz, chief investment officer of Matrix Asset Advisors, a New York-based money management firm that owns 1.2 million shares of Disney. "Steve Jobs would have a huge vested interest in making Disney successful."

But Pixar's shares gained more than 3.5 percent on Thursday, putting the company's market value at just over $7 billion. If Disney were to make a deal for Pixar (Research), analysts said it would probably have to pay a premium to the stock's current valuation.

So is Pixar worth it to Disney?

Disney may overpay for Monsters, Inc

Dennis McAlpine, an independent media analyst, said that a deal would be extremely dilutive to Disney's earnings in the short-term since Pixar trades at about 55 times this year's earnings estimates, compared to a P/E of just 18 for Disney.

With that in mind, McAlpine said he thinks it makes more sense for Disney to just try and sign a new distribution deal with Pixar instead of buying it outright.

Disney has distributed all of Pixar's movies so far. It has paid for marketing and distribution of the films. After recovering those costs, Disney split profits from the films and related merchandise equally with Pixar. The deal will end with this summer's release of "Cars." Disney has the rights to make sequels to any of the films in the current agreement.

Katz said that even though he likes the idea of a merger, he's also worried about how much Disney would have to pay.

"Strategically it makes a good deal of sense. However, it comes at a dear price," he said.

Another analyst said that it's impossible to tell if a deal will benefit Disney since Pixar has yet to give Wall Street any indication about what it is working on after "Cars."

"Trying to assess the earnings impact of a deal is tough since having no visibility makes it difficult to forecast," said Richard Greenfield, an analyst with Pali Research. "The investor base has no idea what the 2007, 2008 and 2009 original movies will be like." For this reason, he said that Disney may be buying Pixar at a time when its value is peaking.

In addition, one fund manager who owns shares of Disney said that unless Pixar started to make movies more often -- "Cars" will be just Pixar's seventh film since 1995 -- then it will be hard to justify a deal around the current price.

"Pixar would need to have a dramatic ramp up in production to make the deal worth it," said Bart Geer, manager of the Putnam Equity Income fund. "All things being equal, if Disney management told me they couldn't accelerate revenues, they'd have a hard time convincing me that this would be a good idea."

But Laura Martin, an analyst with Soleil Media Metrics, said that Disney should not worry about these issues since a deal makes such long-term strategic sense.

In particular, she said that with Jobs having a potentially bigger say in how Disney has run, it is likely that Disney would work even more closely with Apple in terms of digital content distribution, another plus for Disney.

Disney already has agreements in place to sell some of its ABC prime time shows as well as content from ABC Sports and ESPN on Apple's iTunes.

"We love this idea. You get accelerated cooperation between a content provider and the most innovative consumer electronics company so Disney should be able to create value faster," she said. "That's far more important than complaints about overpaying by a couple of hundred million dollars."

Finding Ego?

Disney could also benefit from having Pixar's creative head, John Lasseter, back in the Disney fold and in charge of all of Disney's animated movies. Lasseter left Disney in 1984 and joined Pixar in 1986.

Katz at Matrix said that it would probably have been impossible to imagine Lasseter working for Disney if Michael Eisner were still in charge. But Eisner's successor, Bob Iger, has quickly moved to repair the bad blood between Disney and Pixar.

"Happily it's a new Disney. They have a new CEO and one of the good things he's done is mend a lot of bridges," Katz said.

Still, could Iger and Jobs peacefully co-exist? Many media mergers have run into trouble due to dueling egos.

Soleil's Martin said, however, that she thinks Iger would not have a problem. "Iger doesn't have a big ego and one of the reasons that he is so valuable is that he can work with very large egos," Martin said. "There isn't another CEO in media that could work as well with Steve Jobs as Iger can."

McAlpine conceded that Iger gets along a lot better with Jobs than Eisner did. But he still doesn't think a deal would necessarily pan out well, adding that Iger finally is in the spotlight at Disney. Merging with Pixar, instead of partnering with it, could make him second fiddle to Jobs.

"It's one thing to dance with someone a party. It's another thing to have to live with them," he said. "Iger stayed under Eisner's shadow for a long time and I'm sure he doesn't want to go back under another shadow."

For Andy Serwer's take on Pixar and Disney, click here.

For more about M&A and break-ups in big media, click here.

It's been a nightmare on Wall Street for DreamWorks Animation. Click here for more.


Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan. Top of page

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