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The Buyside:
Disney's $4B Deal for Lucasfilm May Bode Well for the Middle Market

The cash and stock “Star Wars” deal underscores value of intellectual property and new media models

The middle market can learn a lot from the $4 billion megadeal between Walt Disney Co. (NYSE: DIS) and Lucasfilm Ltd., which owns the "Star Wars" franchise. The logic behind the hefty price tag goes back to more than 30 years of character licensing and mass merchandizing. These days, games and online ventures are where it begins much more quickly, says Allan Grafman, chairman of video game publisher Majesco Entertainment Co.

"The Lucas success is reflective of an old business model," says Grafman, referring to George Lucas' 1977 film, "Star Wars." "Now, the business model has shifted from motion picture to other forms of media, primarily social and online gaming." In this arena, Grafman and others believe dealmakers can cash in, because new characters and intellectual property can gain a cult-like following.

Rovio Entertainment, the Finnish computer game developer behind the Angry Birds franchise, was offered $2.25 billion by social gaming giant Zynga Inc. (Nasdaq: ZNGA) in 2011. The deal never came to fruition but underscores the popularity of the characters through mass exposure on new media platforms, such as tablets and smartphones. "The necessary capital required to make such an impact has decreased significantly," Grafman adds.

With the acquisition of Lucasfilm, the owner of all "Star Wars" intellectual property- which includes thousands of characters, games, toys, and a six-film series- Disney is echoing the $4 billion purchase of Marvel Entertainment, which it completed in 2009 and its $7.4 billion deal for Pixar in 2006.

While the Marvel deal added The Avengers to Disney's array of characters and Pixar allows Disney to maintain ownership over hits like "Toy Story," buying "Star Wars" lets the Burbank, Calif. company wield characters, such as Darth Vader, in a similar respect.

But like Rovio and Zynga, Graffman points out that Pixar and Lucasfilm were created with not a lot of capital to begin with, recalling how Marvel Entertainment Group Inc. emerged from bankruptcy in 1998.

There is no barrier to entry for the middle market to repeat that success and ultimately sell IP assets for high multiples, explains Gabe Fried, CEO of Hilco Streambank, which advises copyright sales.

Gone are the days of Disney animators hand drawing animated movies. "Now, you can use editing software on an iMac," Fried adds.

Disney CEO Bob Iger stated after the Oct. 30 deal was announced that the House that Mickey Mouse built would develop "Star Wars game" experiences that would focus on the "social and mobile" markets.

The fact that Rovio announced the upcoming Angry Birds: Star Wars edition in early October speaks to the strength and reach of new technology and how it can be used to consume content.

"We've ended up with a more democratized model of production," Fried adds.

 

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