Walt Disney (NYSE: DIS) has a stunning record when it comes to acquisitions.
Continue Reading Below
The company paid $7.4 billion for Pixar, and $4 billion each for Marvel and LucasFilms. That $15.4 billion total seems steep until you consider what the Mouse House got for its money. With the three movie brands Disney can release roughly two Pixar movies, three Marvel films, and one Star Wars title each year, all with the potential to do $1 billion or more at the box office.
Essentially, Disney bought itself hit-makers that it can exploit not only in movie theaters, but across TV, theme parks, and product licensing. That's generally the type of deal the company does -- it swings for the fences with very little risk involved.
That's what makes the company's $500 million purchase of Maker Studios so curious. It's a smaller play where Disney ended up owning a company that specializes in making videos for YouTube. It was a purchase designed to go after the elusive Millennial market by gaining a foothold on a content platform younger folks favor.
It seemed like a risk at the time the deal was made, and a little over three years later it looks like Disney made a rare mistake.
Disney wanted Maker Studios to extend its reach to younger people. Image source Getty Images.
Bad by Disney standards
It's worth noting that the Maker Studios deal is not an outright failure. The company has continued to grow, but not at the level Disney or its founders expected. At the time the deal was made Maker shareholders received $500 million, but could earn another $450 million if performance goals were reached. Those targets were only expected to be partially met by the end of the deal term, meaning Disney paid about $675 million in total.
That had to be disappointing for Disney CEO Robert Iger, who spoke glowingly of the deal in a press release when the acquisition closed.
"Short-form online video is growing at an astonishing pace and with Maker Studios, Disney will now be at the center of this dynamic industry with an unmatched combination of advanced technology and programming expertise and capabilities," Iger said.
That's true, but in addition to under-performing Maker lost its CEO Ynon Kreiz when the earn out period expired. The company also laid off people from the division and shifted its focus from what was once over 60,000 content creators to its most-popular talent, Variety reported in February,
Why was Maker a bad deal?
Disney has not been able to create its own breakout digital star and it has had some embarrassing problems with PewDiePie, arguably the most famous YouTube personality, who was found making videos involving anti-Semitic jokes. PewDiePie denied that his intent was hateful, but Disney dropped the digital star and exposed its brand to tarnish in a market where the rewards are relatively small.
That's the overall problem with the Maker Studios deal. Disney did not need to buy another company to exploit its own content/properties on digital platforms. Buying Maker perhaps made it easier to do that, but the real goal of the purchase was creating new stars.
That has not happened and even if it did, the upside is relatively low. That's a lesson Disney probably should have learned from its cable networks, which have created breakout stars like Miley Cyrus whose long-term success does not benefit the company.
It just wasn't worth it
There are many companies happy to grind out success. Like a singles hitter in baseball, they try to string modest accomplishments together to build something of value.
Disney is not one of those companies. Buying ABC, Marvel, Pixar, and LucasFilm are the types of massive deals the company makes where the price tag may be high, but the risks are minimal. The Maker Studios deal was the opposite -- it was cheap by Disney standards, but the upside was more limited, and the negative potential was much higher.
10 stocks we like better than Walt DisneyWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Walt Disney wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 1, 2017