NEW YORK (TheStreet) - DreamWorks Animation (DWA) shares surged on Monday following reports over the weekend that the movie studio, known for hit film franchises such as Shrek, Kung Fu Panda, and Madagascar could be acquired by Japanese conglomerate SoftBank (SFTBF) .

A deal, which has not been formally announced as of press time, could potentially value DreamWorks, founded and run by Jeffery Katzenberg, at $3.4 billion, according to The Hollywood Reporter. SoftBank is reportedly offering DreamWorks $32 a share, the article stated. DreamWorks stock closed on Friday at $22.36. Shares were surging 17.3% to $26.23 on Monday.

Watch the video below for more on SoftBank's potential acquisition of DreamWorks:

Analysts had mixed perspectives on the possibility of SoftBank acquiring DreamWorks. Here's what they had to say:

Jessica Reif Cohen, Bank of America Merrill Lynch (DreamWorks Moved to No Rating)

Over the years, several Hollywood studios-even foreign investors from markets such as China where DWA is well positioned for substantial long-term growth-have long been mentioned in press speculation as the ultimate acquirers of the smid-cap animation studio. Thus, a possible Softbank acquisition is somewhat surprising, particularly for a company that has struggled to monetize its films in the Japanese market. However, we believe a potential deal could yield benefits, as DWA could enjoy greater access to capital for growth initiatives and could better align itself with Softbank's portfolio companies in the telecom, gaming and on-line spaces (where growth opportunities for content owners often reside). The press reports suggest that DWA founder and CEO Jeffrey Katzenberg would sign a 5-year contract to remain with the company post-acquisition.

While the outcome of any potential Softbank/DWA talks remains to be seen, we view the reports favorably, as in our view a transaction would mark yet another milestone for the rising values of Hollywood content in an environment where there are more ways to monetize than ever before. Additionally, other potential bids could emerge. 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.

Late Saturday, various trade publications, including Variety and The Hollywood Reporter, reported that DWA is in talks to sell itself to Softbank Corp. (SFTBF-$72.74:NR), the Japanese multi-industry conglomerate run by Masayoshi Son. The proposed deal as it stands, assuming it's in fact a firm offer, equates to $32/share. Given that DWA has not yet accepted any bid, and given our belief that this is a monopsony situation, we are maintaining our Hold rating and also maintaining our target at $23.00, as we do not believe there is any formal "bid" as of yet.

Doug Creutz, Cowen & Co. (DreamWorks- Market Perform; $21 PT)

Hollywood Reporter reported over the weekend that Softbank is in talks with DreamWorks, with a $32 bid on the table (a 43% premium vs. Fridays close price). We believe Dreamworks has attempted to find buyers in the past, and a sale would solve the existential question of what to do given a very uneven track record at the box office and a lack of meaningful profitability over the past three years.

From Softbank's end, this appears to be about media empire building, with DreamWorks potentially joining its portfolio of fully and partially owned companies including Sprint (S) - Get Report , Gung Ho Entertainment, Yahoo Japan, Alibaba (BABA) - Get Report , and SB Creative (as well as an unsuccessful bid for Vivendi Music). We think it is hard to justify the premium Softbank is reportedly offering. There appears to be little strategically interesting about the deal, in our view. We don't see a lot of rhyme or reason to the pattern of vaguely related assets SoftBank is rolling up; this looks more to us like conglomeratization. Attempts have been made many times in the past to marry content and distribution and they generally have not borne fruit (and have often led to significant value destruction). We also think there is probably something to the notion that DWA is being viewed as a 'prestige' asset due to the fact that it is part of Hollywood. We believe the reported bid of $32 per share, if true, would be a gift to current Dreamworks shareholders.

Yoshiyuki Kinoshita, Bank of America Merrill Lynch (SoftBank - Buy; ¥9,700 PT)

According to the Nikkei, Softbank has verified that it is negotiating to acquire Dreamworks, however it has said the deal is unlikely to close. As Softbank regards itself as a mobile internet company, the idea of a move into content should come as no surprise. However, a string of recent disappointments has made DWA's earnings highly volatile, and its share price has weakened this year. It goes without saying that in this business, personnel is key. If the buyout were to take place, the greatest challenge will likely be in assembling a skilled management team, including the head of production.

Atul Goyal, Jefferies (Softbank - Buy; SFTBY $56.50/¥11,400 PT)

Over the weekend, media reported discussions between Softbank and DreamWorks. This is in line with our thesis that Softbank will expand by investing in Services or Content (or a platform to serve the two). In our view, this may be the only Content asset (in Movie / Music) that is available in a rapidly consolidating space. DreamWorks can benefit with Softbank's network.

"We rate DREAMWORKS ANIMATION INC (DWA) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. Among the primary strengths of the company is its solid financial position based on a variety of debt and liquidity measures that we have evaluated. At the same time, however, we also find weaknesses including deteriorating net income, disappointing return on equity and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • DWA's debt-to-equity ratio is very low at 0.29 and is currently below that of the industry average, implying that there has been very successful management of debt levels.
  • The revenue fell significantly faster than the industry average of 8.1%. Since the same quarter one year prior, revenues fell by 42.7%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • DREAMWORKS ANIMATION INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, DREAMWORKS ANIMATION INC turned its bottom line around by earning $0.65 versus -$0.43 in the prior year. For the next year, the market is expecting a contraction of 112.3% in earnings (-$0.08 versus $0.65).
  • The gross profit margin for DREAMWORKS ANIMATION INC is currently lower than what is desirable, coming in at 28.41%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -12.58% is significantly below that of the industry average.
  • Net operating cash flow has significantly decreased to -$53.95 million or 145.37% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

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