Why Google Should Buy DreamWorks Animation

Google and DreamWorks Animation recently announced a partnership. The search engine and the computer-cartoon concern will run some sort of content-highlight program called YouTube Nation. It will feature popular, notable stuff that appears on the video-clip site. Or something like that. I own shares of DreamWorks Animation, and I see the wisdom in the studio expanding its business model, but you'll have to consider me unimpressed with this deal. It's not what I really want to talk about, anyway. Instead, I'd like to make a proposal:

Google should buy DreamWorks Animation.

Can't survive on cartoons alone

I think a great reason to own shares of DreamWorks Animation is the inevitability of its expansion. The company will collect assets little by little and will eventually find ways to enter other business arenas. I'm oftentimes wary of acquisitions, but I recognize the fact that Wall Street rewards acquisition strategies.

Which brings me to that AwesomenessTV deal. Remember when DreamWorks Animation bought that YouTube channel? I wouldn't blame you for forgetting. When investors think of the studio, I would have to imagine that they, like I, concentrate on the animated-celluloid offerings, the upcoming slate. What the heck is AwesomenessTV, and why did it cost $33 million? Is a YouTube channel really going to be relevant years from now?

DreamWorks Animation CEO Jeffrey Katzenberg wants to hedge against the volatility of movie-investment risk. He apparently believes YouTube real estate offers value and the potential for cross-promotion. He also believes that investing in China's movie markets, computer tablets for kids, and TV series for Netflix will produce significant dividends. He's a smart guy known for his work ethic, and he wants his company to succeed.

An animated acquisition opportunity

While DreamWorks Animation's ambitions are impressive, many shareholders like myself probably are counting on the company being taken off the market at some point by a bigger entity with deeper pockets. This idea is as inevitable as the studio's expansion plans.

A few years ago, there were reports suggesting Katzenberg was shopping the Shrek-maker around Tinsel Town. He played it coy, as you might expect, but I have no doubt he wanted to retire his company's shares and not have to worry about explaining his actions to annoying analysts on conference calls four times a year...who wants to do that? He obviously couldn't make it work.

Nevertheless, DreamWorks Animation would make a wonderful addition to a media company's portfolio. While many consider DreamWorks Animation to be the poor man's Pixar, that's actually saying a lot; Pixar is the premiere animator and storyteller of the lucrative genre that Katzenberg's baby plays in, so you can't tell me that the second in command isn't an attractive asset.

Which brings me to Google

Google owns YouTube. YouTube is the platform for video clips and longer-form material, whether it be generated by the pros or the amateurs (or amateurs who have turned into pros). It captures the attention of googols of eyeballs (yes, it's googol and googolplex, not the other way, as I constantly have to remind myself). It'll always be hard to make good money from, though. Really hard. It has to do with that everything-has-to-be-free mentality. What are you going to do, right?

Well, what you have to do is have the best content you can have at your disposal. And Google could have DreamWorks Animation. Google should have DreamWorks Animation.

Let's look at the could-have part. As of this writing and according to Yahoo! Finance, DreamWorks Animation has a market capitalization of $2.75 billion and an enterprise value of a little over $3 billion. Google reported in its 2013 Q3 report that it possessed $15.2 billion in cash and cash equivalents as of Sept. 30, plus short-term debt of $3 billion and long-term debt of $2.2 billion. In addition, its nine-month cash flow figure was $13.4 billion and its total capital-expenditure/acquisition activity was about $6.4 billion.

Given all that, I'd say Google could easily convince DreamWorks Animation shareholders to give the company up for a hefty premium of somewhere between 50% and 100%. Why so high? I figure shareholders should be compensated for the price appreciation they are potentially giving up (again, I own shares of DreamWorks Animation).

Now for the should-have part. In case Google didn't notice, the digital-entertainment landscape is changing. HBO's competitive moat isn't what it used to be, consumers are cutting cords, cable channels are challenging broadcast networks more than ever before, and Netflix and Amazon.com are delivering content over the web with a particular goal of differentiation in mind: original programming. Oh, and not to mention that Disney owns Marvel and Lucasfilm in addition to Pixar and Club Penguin and all the other stuff Disney owns.

Google doesn't just want to own YouTube for others to program -- that'd be like asking a supermarket chain to eschew development of private-label products and only populate its valuable shelf space with the usual suspects. Google has invested directly in popular channels like Machinima and Vevo. It's done the recent partnership with DreamWorks Animation.

If you think about Amazon, and you then evaluate Google's prospects, you begin to see a nexus of relatable goals. Amazon starts out as an online retailer, invests heavily in its tech systems to further growth, decides to take on Netflix and Hollywood in general with its Amazon Studios initiative. Google would naturally want to do the same thing: it starts out as a search giant, solidifies its position in that industry, leverages that position by experimenting with a slew of business models...content production would be a natural extension, an almost inarguable destiny. Just as Disney pursued an acquisition strategy to bolster its platforms, so too should Google begin to form its own collection of enviable IP trademarks.

Owning DreamWorks Animation would allow Google to enter content production and ownership in a big way. It doesn't come without risks; making and marketing films for an always-fickle-and-cranky public is a wonderfully fun way to lose large amounts of investment capital. When it hits, though, it hits big. Katzenberg used to work at Disney; he knows Disney, and he wants DreamWorks Animation to eventually become Disney-like in size and diversity, with theme parks and cable channels and a thriving merchandising business. I don't know if he ever actually said words to that exact effect, but I don't need to be a mind-reader. Google should want to buy a burgeoning media empire at a premium that will be forgotten far into the future.

And the catalytic effect on YouTube could be enormous. Imagine DreamWorks Animation bringing its magic to the clip channel before any other platform. What if The Croods 3 or Shrek 5 were to premiere first on YouTube before it hit theaters, not for free, but for a price (novel as that is)? Google says it's all about experimentation and entrepreneurship -- that would be one heck of an experiment.

Google: What are you waiting for?

Google should do its due diligence the same as it would with any other transaction, but this is an obvious one to me, one that doesn't require a lot of complicated thought. Going back to Disney again, Google could start with DreamWorks Animation as its answer to Pixar and then look to live-action. Buy Lions Gate Entertainment (which I own) on a pullback? Look into a privately owned production outfit like The Weinstein Company? If you're the owner of YouTube, I'd argue you've got to be looking into strategies like this.

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The article Why Google Should Buy DreamWorks Animation originally appeared on Fool.com.

Steven Mallas owns shares of Disney, DreamWorks Animation, and Lions Gate Entertainment. The Motley Fool recommends Amazon.com, DreamWorks Animation, Google, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Google, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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