Disney would acquire a visual effects firm with Lucasfilm deal

(Chris Pizzello / AP)

Walt Disney Co.’s $4.05-billion acquisition of Lucasfilm was driven by the desire to tap into the “Star Wars” juggernaut.

But the surprise deal will also give Disney other noteworthy assets, including the pioneering visual effects company Industrial Light & Magic and Skywalker Sound.

ILM is considered one of the preeminent visual effects firms in the industry, known for its high-level work on the “Stars Wars,” “Indiana Jones” and “Jurassic Park” movies, the “Pirates of the Caribbean” and “Iron Man” films and an upcoming “Star Trek” film from J.J. Abrams.


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“They are certainly considered the grandfather of all visual effects companies,” said Eric Roth, executive director of the Visual Effects Society. “Will it give Disney a big competitive advantage? I don’t know. Is it something that will bring further stability and a moving forward future to ILM? I suspect it will.”

ILM employs 800 people in San Francisco and 200 more at a studio in Singapore. In recent years, the Lucasfilm division has moved beyond providing post-production services to producing its own content, including its first animated feature film in 2011, “Rango,” directed by Gore Verbinski and released by Paramount Pictures.

In a conference call with analysts Tuesday, Disney Chief Executive Bob Iger said Disney had no plans to change ILM’s operations.

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“Our current thinking is that we would let it remain as is,” Iger said. “They do great work. They do work for multiple studios. It’s been a decent business for Lucasfilm and one we have every intention of staying in.”


Owning an in-house visual effects company could give Disney a leg up at a time when increasingly expensive visual effects are increasingly important to the success of movies. Visual effects can cost as much as $60 million on a big-budget movie.

“It will lower the costs of making visual effects,” said Dave Rand, a senior visual effects supervisor who has worked on “Transformers: Dark of the Moon” and the upcoming “Life of Pi.” “It’s far more efficient to have everything close to home and having everything under one roof rather than having to go to several locations to get their movie done.”

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Despite the strong demand for their services, California effects houses have been squeezed by foreign rivals that benefit from tax credits and lower-cost labor.

In a sign of the times, ILM rival Digital Domain’s parent company recently filed for bankruptcy, prompting the sale of the Venice studio to China’s Galloping Horse and India’s Reliance MediaWorks.

Disney and other studios, however, have had a mixed track record in buying visual effects companies. Although Sony had success with the launch of Imageworks in 1992, Fox purchased visual effects shop VIFX in 1996 but sold it three years later to Rhythm & Hues.

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In 1996 Disney acquired Dream Quest Images, which later became the Secret Lab that worked on the digital film “Dinosaur,” but it closed five years later.

“There is some benefit to holding (ILM) but there are an incredible amount of costs associated with it,” said Scott Ross, a founder of Digital Domain and former general manager for ILM. “Disney has not had a good experience with visual effects companies.”

Despite the magnitude of the deal, investors seemed to barely react to the news Wednesday. Disney shares closed at $49.12, down 96 cents, or only 2%, which analyst Tony Wible of Janney Capital Markets said may be attributable to disappointed investors who hoped Disney would spend more money repurchasing stock than on new acquisitions.

Some analysts reacted positively, saying the deal could ultimately prove as successful as Disney’s purchases of Pixar and Marvel.

“As was the case for Disney’s Pixar and Marvel acquisitions, although near-term financial returns will be difficult to justify, long-term strategic benefits may crystallize over time,” Anthony DiClemente of Barclays Equity Research wrote in a note.

Todd Juenger of Bernstein Research said Disney needs to find about $150 million of annual cost savings from Lucasfilm and generate $1.5 billion in worldwide box-office sales from each of the next three “Star Wars” films to make the deal pay off. “Not heroic given the ‘Star Wars’ brand and Disney’s unparalleled global consumer products network,” he wrote.

As part of the acquisition, Disney would also own Lucasfilm’s “Indiana Jones” franchise, but would have to work with Paramount Pictures on any film properties. That studio has distribution rights to the four “Indiana Jones” films already made and any future productions in all media. However Lucas controls any ancillary rights, such as consumer products.

Lucasfilm has also made several other movies that Disney will own once the purchase is complete, including January’s big-screen story of the Tuskegee Airmen “Red Tails,” the 1994 comedy “Radioland Murders” and 1988’s fantasy adventure “Willow.”

20th Century Fox owns the rights to distribute the original 1977 “Star Wars” far into the future, but will not control its five sequels after 2020. At that point, Disney would be able to release them on DVD, Blu-ray or digitally. Fox is also in line to re-release five more “Star Wars” movies theatrically in 3-D after starting with “The Phantom Menace” last February.

“Star Wars” may also help Disney’s troubled video game division, which could produce new “Star Wars” related titles in the future.

Lucasfilm’s video game division LucasArts was once a major publisher, well known for creative, original games such as “The Secret of Monkey Island” and “Battlehawks 1942.” Over time, the company focused more on “Star Wars” games and was also wracked by frequent layoffs and executive turnover.

LucasArts is currently operating without a permanent president and has not made a new game since 2010’s poorly received “Star Wars: The Force Unleashed II.” This year it announced a new title in the works, “Star Wars: 1313,” but because that game is intended to carry dark themes and be rated M (the video game equivalent of R), it may not fit into Disney’s intent to position “Star Wars” as a family entertainment brand.

“LucasArts is just a machine that churns out ‘Star Wars’ related games now and audiences approach anything they do with a level of skepticism,” said games journalist Adam Sessler, a host of the G4 cable network program “X-Play.”

Times staff writer Joe Flint contributed to this report.


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