Disney, Pixar Permanently Pals?

Are Disney (NYSE: DIS  ) and Pixar (Nasdaq: PIXR  ) ready to make amends? If so, will the renewed friendship last? Rumors have been circulating for some time -- intensifying this week after reports in major publications including The Wall Street Journal and Business Week -- that Disney is bidding to purchase Pixar outright. Earlier versions of the speculative whispers had Disney simply buying a portion of the shares held by Pixar majority shareholder Steve Jobs, with the Apple Computer (Nasdaq: AAPL  ) chieftain being tapped as chairman at Disney; now the rumors have Jobs snaring a seat on Disney's board.

If this seems familiar to Pixar fans, it's probably because the plotline is starting to resemble that of the original Toy Story movie. Old-fashioned cowboy doll Woody once ruled Andy's room. Then spaceman Buzz Lightyear steps in with his fancy lights and lasers, and it wasn't long before Andy had a new favorite toy. Woody and Buzz prove to be fierce rivals, until Woody sets aside his jealousy to realize that he and Buzz can work things out and save the day together.

It's not a stretch to cast Michael Eisner and Disney as Woody, Jobs and Pixar as Buzz, and the animation industry as Andy. Just as Andy's bedsheets and wallpaper went from a Western theme to a spacey motif, the landscape has changed for Disney. The public wanted Pixar's computer-rendered fare, not Disney's formulaic theatrical animation.

If it was as simple as firing up a fleet of workstations, that would be fine, but it was never just about the technology. When Disney tried its hand at computer animation, it produced the forgettable Dinosaur. When it tried to team up with other third-party computer-animation studios to try to bottle the next Pixar, it got the lamentable Valiant. Disney's own Chicken Little fared respectably well recently, but it fell far short of what Pixar's hit machine had been generating at the box office.

The real-life version of Toy Story might have had a rocky ending if new Disney CEO Bob Iger hadn't taken over for Eisner in the role of Woody last year. At that point, Woody became reconciliatory. When Jobs was looking to establish Apple's video-enabled iPod as an attractive vehicle for content producers, Iger rushed to his aid in offering the best shows on the ABC slate. It was undeniable: Woody and Buzz were becoming the best of friends.

Given the warming trend between the two companies, it won't be surprising if Disney and Pixar strike a deal. With their current production partnership ending after May's release of Cars, it was pretty clear that Disney didn't want to be simply a low-priced distributor for Pixar. By the same token, Pixar had little incentive to yield more than that, unless Disney relinquished ownership rights to the properties that Pixar had created for the House of Mouse.

A buyout ends even the coldest of stalemates. It also would come at a time -- and a price -- that is probably agreeable to Pixar. Its shares are at an all-time high, despite a cloudy future. The studio faces a glut of competition, including rival DreamWorksAnimation's (NYSE: DWA  ) plans to ramp up its release calendar. Disney and Pixar would be worth more as a combined entity than as bitter foes; a deal would ensure that Pixar continues to release outstanding original titles while maintaining its level of quality in any Disney sequels to Pixar's earlier franchises.

Computer animation, done right, is a booming industry. It's why both Pixar and DreamWorks Animation have been winning recommendations for Motley Fool Stock Advisor subscribers. It's why Woody has every reason to pay the right price to keep Buzz around. Andy's room has proved to be too big for Woody to navigate on his own.

Longtime Fool contributor Rick Munarriz owns all of the Pixar releases, and he'll doubtlessly be at the multiplex in four months for Cars. He owns shares in Disney and Pixar.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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