Would a SoftBank and DreamWorks Merger Go Straight to DVD?

DreamWorks Animation SKG Inc. (NASDAQ: DWA) has seen its shares surge on reports that the animation studio was in discussion as of September 27 with Japan’s SoftBank for a potential buyout. It is not surprising to see shares up, but readers should recall that DreamWorks is a name that has been speculated as a merger candidate in the past.

SoftBank has reportedly made an offer of $32 per share, valued at $3.4 billion. This offer would be a 39% premium over the most recent closing price of $22.36. However, DreamWorks has underwhelmed this year, falling roughly 37% and losing in the past two quarters.

Not to say that DreamWorks is a bad company. They stand to make a lot of money on the long-term, but this rough patch would seem to be a viable opportunity for SoftBank to acquire it. This would mark the second time that a Japanese technology company would make a move on a Hollywood studio, dating back to 1989 when Sony acquired Columbia Pictures.

Bank of America Merrill Lynch made a comment on this potential acquisition by removing its rating and price target:

Although we had viewed DWA’s fundamentals as relatively challenged given recent box office trends and generally low visibility on successful franchise replenishment efforts, DWA shares are no longer trading on fundamentals, in our view, and we are moving to No Rating. Investors should no longer rely on our previous fundamental equity opinion or price objective.

So are these most recent price moves truly reflective of the stock’s value? In premarket trading, DreamWorks was valued at $28.21, up 26% from its previous close.

One thing stood out here. Despite some hoping for a deal, DreamWorks had a consensus price target of only $22.11 and a 52-week trading range of $19.20 to $36.01. It has a market cap of $1.89 billion. If this deal is really happening, it caught a lot of analysts and institutional investors by surprise.

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