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Why Disney's Surprise $4 Billion Marvel Acquisition Makes Sense

Monday, 31 Aug 2009 | 4:22 PM ET

Mickey, meet Iron Man. Today Disney announced it's buying Marvel Entertainment for $4 billion in cash and stock. I've reported on the fact that Disney has plenty of cash on hand for an acquisition, but the announcement still came as a surprise. But upon closer inspection The Hulk and Goofy have more in common than you might think.

Disney & Marvel logos
Disney & Marvel logos

Get ready to see "The Hulk" at Disney theme parks. Just like Disney , Marvel has proven very good at building high-profile brands around its characters. I'm not talking about Spidey and the famous superheroes, but "Iron-Man," which turned a lesser-known character into a huge hit Paramount distributed last year. Now, with a sequel in the works, Iron Man is a full-fledged franchise, merchandise and all. Marvel's superheroes will attract a larger young, male audience; the Disney XD channel that targets that audience already airs 20 hours a week of Marvel TV productions. And Marvel's movie studio has a reputation for real discipline, keeping costs down and refusing to give stars an inappropriate cut, which is always enviable in Hollywood.

Disney CEO on Marvel Entertainment Acquisition
Walt Disney CEO Robert Iger discusses the company's acquisition of Marvel Entertainment, with CNBC's Julia Boorstin.

Marvel's stock traded sharply higher Monday, and for good reason. The acquisition price of $50 per share is nearly 30 percent higher than Marvel's closing price Friday. Marvel has already had a massive run-up—some 70 percent over the past 2 years, and up some 25 percent year to date. This of course raises the question of whether Disney overpaid, but Disney says the time and the price tag was right and that it expects the deal to be additive to earnings per share in two years, in its fiscal 2012. And many analysts, from UBS' Michael Morris to Barclays Capital's Anthony DiClemente are optimistic, saying this should create value across Disney's platforms. JP Morgan's Imran Khan says Disney's studio needs a boost and this is a defensive move that should do just that.

So why did Disney's stock trade down slightly after news of the deal? It likely has to do with the fact that Disney will be issuing shares to pay for part of the acquisition. But Disney's CFO reassures investors that within a year the company will purchase back as many shares as it issues as part of this deal.

This acquisition will give Disney Marvel's comic book, movie, and licensing business and most importantly its 5,000 characters. A few years ago Marvel started producing its own films, as it did with "Iron Man" a huge hit Paramount distributed last year, with a sequel coming in 2010. But the biggest Marvel characters are licensed by other studios. Sony Pictures Entertainment has licensed Spider-Man for a long-running and successful series of films. News Corp's 20th Century Fox licenses the "X-Men" characters, with "Wolverine" a hit this May. Marvel started producing its own films to take advantage of the upside, and has a highly-anticipated, but sparsely populated slate of films to popularize little-known characters like "Thor."

So what about all of Marvel's current licensing and distribution deals? Disney says it's calculated Paramount's rights to distribute five upcoming Marvel films, and the licensing agreements with Fox and Sony. When the X-Men and Spider-Man licensing deals do expire—Disney wouldn't reveal when—you can bet Disney will want to control those characters. Ditto for Paramount distribution. Paramount issued a statement to state its claims and reassure investors that it won't lose those valuable films. "Paramount Pictures has enjoyed a productive and fruitful relationship with Marvel Studios from the start of our distribution agreement in 2005. So much so, we announced a five-picture slate distribution deal last year which includes worldwide distribution rights for upcoming films: ‘Iron Man 2,’ ‘Thor,’ ‘Captain America,’ ‘Avengers,’ and ‘Iron Man 3.’ This distribution deal will be unaffected by today’s transaction. We look forward to continuing to work with Marvel and, with today’s announcement, to working with Disney to replicate the incredible success of ‘Iron Man’ on all our future collaborative projects.”

So what next? Disney will quickly get to work to figure out how to exploit Marvel's big characters across all its platforms, from the theme parks to Disney XD. They'll look to bring Marvel's intellectual property international, and to new digital models. And you can bet that they'll want to jumpstart development on other Marvel movies and new TV shows about other Marvel characters.

Questions? Comments? MediaMoney@cnbc.com

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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.