5 Reasons Disney Should Buy Electronic Arts

Did my Mickey Mouse ears hear that right?

"Is Walt Disney Co. preparing a bid for Electronic Arts?" That's what The Wall Street Journal's "Heard on the Street" column asked yesterday, building on comments that Disney (NYSE: DIS  ) CFO Tom Staggs made during a conference on Tuesday.

Asked if Disney's focus would be on developing in-house games over buying more developers, Staggs responded, "I don't want you to conclude that those are in the long term mutually exclusive." He went on to say that a "strategic and attractive" purchase would be "a possibility" for the family entertainment giant.

Did he say Electronic Arts (Nasdaq: ERTS  ) ? No. However, a combination of EA's battered share price and Disney's desire to ramp up its gaming presence dovetail nicely in the rumor mill. Even if it's unlikely to happen, let me go over five reasons why it makes perfect sense.

1. Disney is no stranger to gaming shopping sprees
Even if Disney has historically gone with organic releases or licensing deals like the Cars game line through THQ (Nasdaq: THQI  ) , acquisitions are clearly part of its DNA.  The company has already coughed up the dough for purchases like Avalanche Studios in 2005 and the fast-growing Club Penguin online community last year.

EA would be a huge purchase. It commands an enterprise value of nearly $4 billion and that's before we tack on a reasonable buyout premium. However, Disney has aimed even higher in the past in its Pixar and Capital Cities/ABC deals.

2. EA Sports and ESPN were made for one another
It's only fitting that EA's legendary line of sporting titles -- like Madden, Tiger Woods Golf, and FIFA -- huddle up with the parent company of ESPN. In fact, it would be branding magic to have all of the games marketed as ESPN sports.

The move would help Disney reach out to older boys and adult males, whom Disney has had trouble reaching at a time when its biggest hits are tween-girl magnets like Miley Cyrus and The Jonas Brothers. Disney tries. It even has a sports-themed hotel in Florida and a Wide World of Sports complex. Gobbling down EA Sports would be a lot easier than competing against it in the future (where it can, as EA has an exclusive NFL license).

3. Bring on the Warhammer
Online gaming is all the rave these days. A year before buying Club Penguin, Disney teamed up with Shanda Interactive (Nasdaq: SNDA  ) to introduce online games in the ultimate testing ground of China. Disney has gone on to build online gaming experiences themed to its Fairies and Pirates of the Caribbean franchises, but it's rolling mostly snake eyes in reaching older teens who are playing EA's Warhammer or Activision Blizzard's (Nasdaq: ATVI  ) World of Warcraft.

Beyond the multiplayer online fantasy games, EA brings another cyberspace gem to the table: Pogo.com. The casual gaming site is a hub for an entirely different audience: middle-aged women who enjoy playing online puzzle, word, and arcade games.

4. Racing toward the checkered flag
From Herbie to Lightning McQueen, cars have been prolific characters for Disney in live action and animation. Disney's flagship parks have miniature speedway attractions. There is even the Richard Petty Driving Experience just outside the Magic Kingdom parking lot in Florida.

This doesn't make Disney the next International Speedway (Nasdaq: ISCA  ) or Speedway Motorsports (NYSE: TRK  ) , but it all dovetails nicely into EA's Need for Speed driving games. Whether it's a matter of branding its Tomorrowland Speedway or ABC and ESPN auto racing content with the Need for Speed moniker -- or just the ability to make cooler driving games like one featuring all of Disney's signature drives -- a lot can happen if Disney puts the cross-marketing pedal to the metal.

5. Convergence circa 2013
Disney is incorporating gaming elements into its latest theme park attractions like Toy Story Mania. The key is to give its rides a little more repeatability with jaded audiences. Disney also realizes that it can't carve out large tracts of land to build mammoth destinations that attract tens of millions of guests.

Disney will have to think smaller, and it even showcased plans for "blue sky" concepts last year that included urban entertainment centers, themed resorts, and stand-alone attractions. One can argue that Disney has a decent proxy in its DisneyQuest concept in Orlando, but the multistory arcade has been a dud outside of Florida. Would some EA branding muscle, award-winning proprietary original game development, and video game industry know-how turn DisneyQuest into the kind of place that Disney can plop down successfully in major metropolitan markets? I think so. Heck, I know so.

When you wish upon a star
The chances of having any of this play out are slim. Even though EA has gone from leader to laggard in an industry now led by Activision Blizzard, it won't sell itself cheap. Disney overpaid for Pixar because it had to. It was going to lose the computer animation leader as a partner. There is no similar urgency here to acquire anyone, much less EA.

However, the deal makes perfect sense if the price is reasonable. Disney can do so much more with EA's audience-widening power. And vice versa.

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Longtime Fool contributor Rick Munarriz can usually be found at Walt Disney World. He's the one wearing the "Bob Iger Fan Club" T-shirt. He does own shares in Disney. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 11, 2008, at 5:09 PM, gaucho420 wrote:

    Except that 1) every animator I've evern known HATES working for Disney and 2) every programmer I've ever know hates working for EA.

    So a combo? Yeah, I see a flight out of that shop real quick. No one likes to work for Disney, period...let alone computer programmers who will not be told how to eat, dress and sneeze, by Mickey Mouse.

    I typically agree with you, and this buy out may happen, but good luck getting the talent to stay with cheap ass & work you into the ground Disney Attitude.

  • Report this Comment On December 12, 2008, at 6:04 AM, webstir wrote:

    It would be smart of Disney to use that money to buyout the rest of ESPN from Hearst. Or Disney could go into another direction.

    Disney would be MUCH better off buying Marvel Entertainment instead of paying 6-7 billion on the vastly overrated EA. With Marvel its gets the rights to 4,000 characters for about 3.2 billion. Can you imagine what the Pixar folks could do with Marvel good and bad guys?

    Disney is creating a new cable channel to appeal to boys and to better compete with the Cartoon Network. Marvel is just the vehicle to dive that channel 24-7 to assure success against the Clone Wars from Lucas Arts. EA sports can't support a cable channel and it can't compete against Time Warner's DC Comics or Lucas Arts.

    Sure Marvel has pimped out a lot of its best heroes to other movie studios. Fine let Disney continue to capitalize on that stream of revenue which, by the way EA sports can't generate. Those movies from other studies can be played - over and over again - on the new Disney cable channel.

    EA sports NEEDS ESPN but Disney (and its investors) don't need EA sports. There are tons of game shops out there an only one ESPN. Therefore there is no reason for Disney (and its investors) to cough up an extra 2-3 billion to buy EA over Marvel.

    Marvel can be applied over ALL FOUR major Disney business lines (Parks/Recreation, Movies, Cable/Broadcast, and Licensing) - just like Pixar. EA does not fit into as many business lines in Disney. EA only fits well into a minor Disney business line.

    Sure Disney could stand to beef up its Interaction gaming business. But there are other gaming companies to buy at a lower price. Again, EA sports will always need ESPN so why purchase the cow when you can drink the milk through licensing?

    Buying EA does not offer enough value to Disney investors. Buying Marvel would be just like buying a mini-Pixar to boost all of Disney's business lines.

    Plus Disney could license out Marvel characters to EA sports and squeeze more money out of the company without having to buy it. Why make games when you can simply dole out your intellectual property to EA sports?

    It is fun to talk about Disney wasting money on EA sports - IF your money is not involved.

  • Report this Comment On December 12, 2008, at 11:08 AM, disneyki wrote:

    For one Disney Quest Orlando is being closed down by the mouse.

    There are other properties EA owns besides Sports that Disney could exploit such as the popular Sims, Command & Conquer (lame movie anyone?), Battlefield.

    But EA Sports is by far the biggest asset. I could see EA kiosks around the soon to be ESPN branded sports complex at Disney World showcasing the games. I could also see the EA Sports Madden tournament live on ESPN 2.

    Marvel would be an interesting pick up since Disney already has a first look contract with Stan Lee. There would be a lot of licensing issues with Universal Studios to deal with.

    If I was Disney I would be saving my money and give George Lucas an option payment to buy his empire upon his demise. Disney and Lucas are already integrated in the theme parks. The movie properties, characters, video games and ILM would be golden for Disney and well worth the premium.

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