SoftBank Corp (TYO:9984) To Purchase DreamWorks Animation SKG Inc (NASDAQ:DWA)

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By Mark Michaels on September 29, 2014 Company

It was just reported that SoftBank Corp (TYO:9984) is participating in discussions to either purchase or partner up with DreamWorks Animation SKG Inc (NASDAQ:DWA). This deal could help the Japanese company and the American Hollywood studio seek new methods to successfully compete with rivals around the globe.

The news follows almost two months after SoftBank gave up on a bid for T-Mobile US Inc (NYSE:TMUS). A deal with DreamWorks Animation could give the Japanese conglomerate’s Sprint Corp (NYSE:S) business another way to challenge top mobile carriers in the United States, such as AT&T (NYSE:T) and Verizon (NYSE:VZ).

Instead of directly expanded the company’s telecommunications network, Masayoshi Son, the chief executive officer of SoftBank, now seems to be focusing his efforts on acquiring content creators, namely videogame studios. These videogame creators have the ability to create products that can attract potential mobile subscribers.

Earlier last month, Mr. Son decided to drop the bid for T-Mobile, the fourth biggest cellular operator in the United States, and combining it with Sprint, the third largest mobile carrier in the country. This was due to the opposition from the government, who had raised antitrust concerns.

The Japanese company is in the right position to purchase other firms mostly due to the recent influx of funds from the initial public offering of Alibaba Group Holding Ltd (NYSE:BABA), a Chinese Internet retail company. SoftBank owns 32 percent of the Chinese internet company.

Those familiar with the discussions between SoftBank and DreamWorks refused to give away a possible price for the studio company. Currently, DreamWorks Animation has a market values of about $2 billion. The discussions are still in early stages, and could possibly lead to an investment or a distribution partnership rather than an outright purchase.

DreamWorks Animation has been struggling for along time as a somewhat small, publically traded Hollywood studio. Being absorbed by a conglomerate such as SoftBank could protect the studio from pressure from investors. The animation studio’s shares have generally risen or fallen based on the financial performance of individual movies, and a recent trend of disappointing movie performances have caused the company’s stock price to fall by almost 50 percent since 2010.

The company has released some of the best performing hits in the history of animation, such as “Shrek” and the “Madagascar” films. However, its latest releases, like “Rise of the Guardians” have been significantly less successful.

Jeffrey Katzenberg, the chief executive officer of DreamWorks, has been pushing a business plan to reduce his company’s dependence on the two or three films that it produces each year. The plan calls for the studio to expand into online video, consumer products, and television. But considering the company’s relatively small size, it would be almost impossible to create a global infrastructure that could successfully compete with the consumer products, television networks, and theme parks of huge firms like Walt Disney Co (NASDAQ:DIS).

The company also faces competitors from smaller rivals, like Blue Sky Studios Inc, the makers of “Ice Age”, and Illumination Entertainment, the producer of “Despicable Me”. These studios have had very close success at the box office with DreamWorks, and often with movies that cost significantly less than those of DreamWorks. Such pressures have pushed Mr. Katzenberg to cut back on his studio’s costs.

If the animation studio were to sign a deal with Softbank, they could easily enter the fast growing market in Asia. Two years ago, the company partnered with multiple Chinese investment companies to build a studio in China to produce action and animated films for global audiences.

Even through DreamWorks is small in size, it carries a high profile because it’s leader, Mr. Katzenberg, founded the much larger DreamWorks SKG studio with David Geffen, a former music executive, and Steven Spielberg, a movie director. 2004 was when the animation studio spun off from the larger parent company.

DreamWorks Animation posted a net loss of $15.4 million and revenues of $122.3 million for the second quarter.

Mr. Son is the first well-known Japanese investor to go after a Hollywood company in 25 years, back when Japanese electronic firms were acquiring studio assets.

Mr. Son stated that the wants to grow SoftBank into the largest company in the world, and that he plans to grow its market value to 200 trillion yen, or the equivalent of $2 trillion by 2040. Currently, the company is valued at 10 trillion yen.

With the initial public offering of Alibaba, SoftBank’s stake in Alibaba has grown from $20 million to about $71 billion in just 14 years.

SoftBank already has a total of over 1,300 companies as possible investment deals. The company’s main targets are media, internet, and content firms in the United States. Since SoftBank already has a network infrastructure in place, it would benefit most from content businesses.

In the past few months, SoftBank has been linked to a myriad of potential companies, including Yahoo Inc (NASDAQ:YHOO), Vodafone Group (LON:VOD), and Line Corp. Softbank already holds a stake in Yahoo Japan Corp.

As for digital content, SoftBank is expanding its business in that area by hiring Nikesh Arora, one of the key forces behind the growth of the search advertising department of Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL). It was Mr. Arora who pushed forward the talks between SoftBank and DreamWorks Animation.

Last month, SoftBank gained control of Supercell Oy, a mobile game firm based in Finland that produced games like “Clash of Clans.” SoftBank also holds a controlling stake in GunHo Online Entertainment Inc, a Japanese company that created “Puzze & Dragons.” Investments like these have propelled SoftBank to the ranks of the top-grossing provider of mobile game applications for smartphones in all the world.

However, efforts by media and telecom companies that brought distribution and content under the same category often do not live up to expectations. Vivdendi SA from France sold its Hollywood assets in 2004 to General Electric Co (NYSE:GE), having held onto them for only 4 years.