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10-Q Watch: No Earnout For Club Penguin Founders In ’08; Still Have Shot At $175 Million

imageWhen the Walt Disney Co. (NYSE: DIS) acquired popular virtual world Club Penguin in August 2007, the company was upfront about the cost: $350 million in cash at the time with the possibility of another $350 million. To earn that additional $350 million, CP cofounders Lane Merrifield, Dave Krysko and Lance Priebe had to meet earnings targets. Club Penguin makes its money from premium subscriptions (the it had 700,000 when acquired by Disney) and sales of virtual items.

But according to SEC filings, including the 10-Q filed Tuesday in conjunction with FYQ2 earnings, Club Penguin missed its goals for 2008. That leaves another $175 million on the table for the three but given the current economic climate, it’s looking more likely that Disney will end up paying $350 million for Club Penguin — not $700 million.

Does that mean the acquisition was a failure? No. Club Penguin, now part of Disney Online and the Disney Interactive Media Group, continues to play a major role in Disney’s virtual-world push and its international plans. Its most recent expansions were to France and Portugal. It’s a reflection of Disney’s caution in certain kinds of spending that the deal came with these strings attached — and of the difficulty projecting targets when the economy shifts like tectonic plates.

From the 10-Q: “On August 1, 2007, the Company acquired all of the outstanding shares of Club Penguin Entertainment, Inc. (Club Penguin), a Canadian company that operates, an online virtual world for children. The purchase price included upfront cash consideration of approximately $350 million and additional consideration of up to $350 million payable if Club Penguin achieved predefined earnings targets in calendar years 2008 and 2009. There have been no additional payments of consideration for Club Penguin and remaining additional consideration of $175 million is potentially payable based on calendar year 2009 results.”

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