Barron's
February 27, 2006
Could Apple Make a Bid for Disney?
By MARK VEVERKA
COULD WALT DISNEY BE the apple of Steve Jobs' eye?
Not that long ago, Apple Computer shares were treading water -- and downloading digital music over the Internet was largely an illicit activity confined to college dormitories. But a lot has happened since company co-founder Steve Jobs returned to Cupertino and launched the iPod craze.
Apple's shares (ticker: AAPL) now trade around 72, a staggering 18 times the $4 they fetched nine years ago, when Jobs returned to Apple -- where he quickly became interim chief executive. The interim tag was dropped in 2000.
Apple, whose shares were split, 2-for-1, in 2005, now boasts a stock-market value of more than $60 billion -- about $10 billion more than Disney's (DIS). Of course, Jobs will soon be the largest shareholder in the House of Mouse, with about a 7% stake, thanks to Disney's recent $7.4 billion blockbuster buyout of Pixar. To put it in perspective, that's close to four times the 1.8 % held by deposed Disney CEO Michael Eisner, and nearly seven times the stake owned by director emeritus Roy Disney, who co-founded the company with his late brother, Walt.
Now that Jobs has traded his Pixar shares for a big wedge of Disney, is it outlandish to speculate that Apple could ultimately make a run at Disney? "I think he has an open option," says analyst Christopher Whalen, a New York-based managing director of Institutional Risk Analytics, a research boutique in Hawthorne, Calif. "Disney is badly undervalued right now. Jobs might get an opportunity to take it out."
Given his Buy call on Apple in 2002 -- based on the iPod's early promise -- Whalen just might be worth listening to here. At the least, the stage is potentially set for Apple to combine its media-delivery prowess and legacy hardware business with Disney's "distressed" content and entertainment businesses, Whalen suggests.
The key is Jobs. He is the rare executive who is as wired into Hollywood as he is into Silicon Valley. It makes him uniquely qualified to marry next-generation digital-media distribution with one of the most prolific and dominant entertainment brands in the world.
"By leveraging his understanding of technology and his credibility with the content creators in the entertainment industry, Jobs turned a niche PC maker into a media company," Whalen observes. That, in turn, has bought Apple the necessary time to switch the sourcing of its silicon processors from Motorola's (MOT) former chip unit (now Freescale Semiconductor) and IBM (IBM) to more mainstream devices from Intel (INTC). The widely hailed move has given Apple's core computer operation fresh legs.
What's more, the combination of Disney's valuable film, video and animation archives (which include everything from ABC television sitcoms to historic ESPN sportscasts) and the digital rights expertise of Apple could be very powerful.
If Apple were to develop a next-generation technology for distributing such content, it would have the exclusive rights to some of the most desired entertainment footage around. Apple could bootstrap the launch of a new device or product on the back of Disney's film and tape libraries, without having to worry about other film and broadcast giants doing the same.
"From an intellectual-property standpoint, it would be a match made in heaven," says intellectual-property attorney Alan Fisch, a partner in Washington, D.C.-based Kaye Scholer.
The iconic companies share another thing in common: They are two of the world's most identifiable and beloved brands, and they enjoy strong customer loyalty.
Still, it all comes back to Jobs. The Cupertino Kid has not only demonstrated his chops as an entrepreneur and a turnaround artist, but has proven to be a pretty good deal maker, too. In 1997, he sold his small NeXT computer franchise to Apple for $402 million, paving the way for his rescue of the bigger company. What's more, in 1986, he snapped up an animation studio that eventually became Pixar from Star Wars creator George Lucas's Lucasfilms for $10 million. This year, he flipped that asset for $7 billion. Not a bad trade.
And who's to say that he's done deal-making? The mogul underwent pancreatic cancer surgery in 2004. At 51, he's a relatively young cancer survivor with a new lease on life.
Of course, there are potential obstacles.
First, the Pixar deal must close, and Disney must demonstrate that its bureaucracy won't suffocate the animation outfit's free-spirited creative culture.
Second, and most important, Jobs would have to want to take on the additional responsibility of running an entertainment empire that includes resorts, theme parks, restaurants and a sports-programming powerhouse. Some Steve-watchers contend he simply has no interest in doing this.
Of course, Apple could merge with Disney without Jobs at the helm, but what would be the point of that? Also, as a Disney director, Jobs would have to leave the boardroom and recuse himself from any potential merger talks. On top of all of that, current Disney CEO Robert Iger, might have the last word about all of this conjecture.
Still, Whalen argues that the idea isn't the craziest. "The markets and Disney shareholders would welcome a merger led by their apparent savior, Steve Jobs," he says, adding: "Stranger things have happened, like a tiny niche computer maker with a closed proprietary operating system becoming the dominant player in online music."
Now, that's really crazy.
