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Behind the DreamWorks Sale
December 12, 2005

By James L. Hirsen, J.D., Ph.D.
contributor to

David Geffen is no stranger to the art of the deal.

On his way to becoming a billionaire the former talent agent and music producer formed Asylum Records, a company he sold to Warner Communications in 1972 for $7 million, and Geffen Records, another company that in 1990 he sold to MCA for $1 billion. Not bad for a guy who never graduated from college.

In 1994 Jeffrey Katzenberg started a company with Geffen and Steven Spielberg after then-CEO Michael Eisner picked someone else to be Disney's president.

Now it looks as if Geffen has scored another sale. Viacom/Paramount has reportedly made a deal to pay $1.6 billion to acquire the trio's company, DreamWorks SKG. But there's more to the story than meets the eye.

The sale was expected by Hollywood. The buyer, on the other hand, was not.

The conventional wisdom was that DreamWorks was going to be bought by NBC Universal (owned by General Electric). The arrangement seemed like a natural fit since NBC Universal was the distributor of DreamWorks DVDs and handled theatrical distribution to overseas markets. It had also participated in financing many a DreamWorks movie.

The two companies had been talking about making a deal for a while. Enter Paramount, the film division of Viacom.

Viacom/Paramount was looking at making an offer for DreamWorks a couple of months ago but Viacom's board nixed the idea due to its plans to split in two. (Viacom reportedly plans to split into two entities by year's end. Viacom and Paramount will apparently stay in one company and the CBS television network and Infinity Broadcasting in the other.)

Up until recently NBC Universal was in the catbird's seat as the only bidder to acquire DreamWorks. But a seasoned dealmaker like Geffen would need another player.

NBC Universal had given Geffen a little gift when it altered a portion of its overseas distribution. A provision in the distribution contract allowed for DreamWorks to escape the agreement the next time it expired (2006).

Geffen would be able to pack some leverage into a potential DreamWorks transaction by letting it be known that Universal's distribution arrangement would be over at its expiration.

Geffen had indicated that he wasn't happy with what he perceived as a slow, pedantic negotiation style of executives at Universal's parent, General Electric. In the talks to buy DreamWorks, Universal tried lowering Geffen's asking price from $1.5 billion to $1.4 billion. But Paramount came back to the bargaining table with an offer at a higher price. And this time the purchase appealed to the Viacom board since private investors would share the risk of the acquisition.

Deal watchers assumed that the Viacom/Paramount offer was a ploy to induce Universal to up the ante. But for Paramount, the move was necessary to increase its production slate. (DreamWorks has nine films ready for release in 2006.) The studio would also acquire a library of about 60 films as well as a certain renowned director by the name of Steven Spielberg.

Spielberg had previously telegraphed his desire to remain with Universal (the studio that made "E.T. – The Extra-Terrestrial" and where Spielberg maintains his office) and was reportedly amenable to the Viacom/Paramount deal.

Geffen took the new bid from Viacom/Paramount and did what sellers often do: Play the offers against each other. He purportedly gave Universal a last chance to meet or beat the Viacom/Paramount price.

Apparently, Universal didn't bite.

Instead it seems that the Viacom/Paramount deal was sealed for $1.6 billion at a meeting where Geffen and Spielberg sat down with Viacom CEO Tom Freston and Paramount chairman Brad Grey.

Grey, like Geffen, is a former talent agent. Grey was a manager for Jennifer Aniston and Brad Pitt, while Geffen managed to bring Bob Dylan to his record company.

It looks like their prior vocational training came in handy at just the right merger moment.

Reproduced with the permission of . All rights reserved

Copyright © 2005
James L. Hirsen, J.D., Ph.D.

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