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Marvel-Disney's Magical Kingdom

Posted: Oct 08, 2009 14:14 PM by Greg Sushinsky

Tickers in this Article: VIA.B, NEWS, SNE, TWX, MVL, DIS

The Walt Disney Co.'s (NYSE:DIS) offer to purchase Marvel Entertainment for $4 billion (NYSE:MVL), which was announced August 31st, seems like a good if not perfect marriage of the two companies. But there are a few potential snags to the deal that investors ought to look at.

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Synergies and Cash Flow
On the face of it, Marvel's comic book properties, super-heroes such as Spider-Man, X-Men, The Fantastic Four, Iron Man and other popular characters who've made the transition to the big screen, seem naturals for Disney, the giant movie, media and entertainment company, to pick up. After all, Disney's historically strong licensing of its iconic brands looks like a good fit. Proponents of the deal point out that critics had said Disney overpaid for Pixar and wouldn't be able to utilize it properly, yet Disney eventually has proved highly adept at letting Pixar continue to do its creative thing, while Disney has enhanced the economic value of the Pixar properties. Critics of the Disney-Marvel deal maintain that integrating the Marvel properties won't be so easy, and that business constraints from tighter operations might constrain Marvel's creativity.

Business Vs. Creative
Then there is the price Disney is paying; the $4 billion combination of cash-and-stock, which richly values Marvel shares at $50. Whether this premium will be worth it for Disney depends of course on Marvel, or Marvel under the Disney umbrella, continuing to crank out the hits. Yet, there are similar synergies that work less well currently, notably Time Warner (NYSE:TWX), which has the DC Comics properties, including Batman and Superman. The whole Time Warner amalgam of print, movies, and cable networks seems more loosely stitched together than organically whole, or even integrated. So synergy is not automatic. Though granted, Disney is a much better run company than Time Warner. Also, many of Marvel's movies are already tied up at Sony (NYSE:SNE) News Corporation's 20th Century Fox (Nasdaq:NWSA) and Viacom's Paramount (NYSE:VIA.B ), and there is no guarantee of future successes of Marvel films. Critics of the deal therefore feel it will be difficult to sustain the rich cash flow Marvel has seen in the last few years.

Marvel's Appeal
Marvel does have many positives that fit well with Disney. If Marvel can continue to create successful films, the premium Disney is offering to pay in the deal will be well worth it. There are potential synergies with the further licensing of Marvel properties, something Disney does as well as anyone (think expansion in the amusement park and video game space).

Remember Comic Books?
One of the oddities surrounding the deal is that although characters, movies, licensing, synergies and cash flows dominate commentary, little is said about the origin of the Marvel heroes: comic books. Both Marvel and DC have thriving print comic book businesses which were the creative incubators for all the ancillary largesse, and once the business centerpieces of their companies. The creative pipeline for icons is neither easy nor quick, as most of the current popular Marvel heroes sprang from their creators' imaginations more than forty years ago.

One of the creators, Stan Lee, Marvel's legendary writer and an emeritus with the company, is wholly enthusiastic for the merger, while a dimmer view was taken by the heirs of Jack Kirby, Marvel's other major creator in the silver age of comics, as the Kirby heirs are suing to recapture copyrights of Kirby's co-creations. While this may seem a formality for investors to dismiss, keep in mind that without the strength of the original comic book business and characters, there is no Marvel as we know it today.

The Bottom Line
In all likelihood the Disney-Marvel deal will be ironed out and go through, and the probability is that savvy Disney will make it succeed, but not without struggles, so the success of Marvel under Disney rubric in what is still a fragile, tempestuous creative business is anything but sure. (To learn more, check out our Mergers And Acquisitions Tutorial.)

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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