DreamWorks Animation (NYSE:DWA) is a powerhouse brand in the computer-generated cartoon industry. Most people might think of Disney's (NYSE:DIS) Pixar label first when thinking of computer-generated imagery, but I'd bet that DreamWorks comes in a very close second. Because of this, the company's stock makes for a very interesting investing idea. In fact, David Gardner selected DreamWorks for the Motley Fool Stock Advisor newsletter service late last year.
Now comes word that Paul Allen, the billionaire investor who made his fortune from Microsoft, wants to get a little cash back from his involvement with DreamWorks. He received $130 million from the IPO, and it looks like he may walk away with another $220 million from a secondary offering that he has the right to trigger. According to The Hollywood Reporter, that offering should occur sometime after Nov. 3.
Secondary offerings can be scary things for shareholders. They can cause volatility in the stock price, because there are more shares available for trading and/or they are dilutive. (In this case, the offering won't cause dilution, because it's composed of shares that already exist under a complex holding arrangement with Allen and others.) I myself have been the victim of the dreaded secondary offering; believe me, it's not fun to see the price of one's stock plummet after a company announces one.
Shareholders shouldn't spend a lot of time fretting over this situation, however. Consider the ultimate value of DreamWorks over time: The company will produce a lot of cartoon franchises and will reap tons of cash. What business do I have making such a claim? Well, the company's resume is pretty impressive, even with the increased competition coming from conglomerates like News Corp. (NYSE:NWS) -- which has the Ice Age franchise -- and Time Warner (NYSE:TWX), which will take its shot at computer-generated imagery with Happy Feet in November. There have also been offerings from The Weinstein Company -- Hoodwinked -- and Sony (NYSE:SNE), which released Open Season last month.
You can see that DreamWorks could easily survive any hit from a secondary offering triggered by Allen. But investors should know that a lot of the uncertainty from this expected offering had already been priced in, keeping the stock price low despite the company's better-than-expected financial performance. In addition, it's not as if the company is tacitly declaring its stock to be overvalued by selling shares to raise capital -- again, this is just Allen cashing out. Any volatility that might result -- no guarantee that it will -- would be a gift to shareholders, giving them a chance to buy in, or augment their investment, at lower prices. Next summer, the third Shrek film is due to paint the company's coffers a fairy-tale shade of green. That franchise has been a boon, and although Madagascar might not be as big a phenomenon, DreamWorks should see plenty of free cash flow from that tentpole as well.
With Pixar now in the hands of the Mouse, DreamWorks Animation is probably the best way to expose a portfolio to this sector. Paul Allen has a right to exercise a secondary offering -- that's fine. Traders may cause increased swings in the stock price, but smart shareholders will ignore them and focus on the bottom line -- i.e., DreamWorks' ability to fill its coffers with cash via well-made franchise films.
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Fool contributor Steven Mallas owns shares of Disney. The Fool has a disclosure policy.
