Walt Disney Co, which has been struggling to inject life back into its animation studio, is said to be in talks to acquire Pixar, the hit-making firm behind Finding Nemo, Toy Story and The Incredibles.
The company is reported to be discussing an all-share deal that would pay a modest premium to Pixar's current market value of US$6.7 billion.
If the deal went through, it would make Steve Jobs, Pixar's chairman and the founder of Apple Computers, Disney's biggest individual shareholder.
The report in the Wall Street Journal appeared to confirm months of speculation. Robert Iger, who took over as Disney chief executive from Michael Eisner last October, has made restoring the firm's reputation in animation his No. 1 priority.
Under a seven-film deal, Disney co-funded and distributed Pixar's computer animation movies, also taking a share in their profits. By some estimates the Pixar relationship generated US$1 billion in profits for the company, more than half the Disney film studio earnings over the same period.
But when it came time to discuss renewing the deal, Jobs and Eisner suffered a public and acrimonious falling-out. In June 1994, Pixar said it would open talks with other studios. Pixar's next film, Cars, is the last under the Disney deal.
There have been signs lately that relations between Jobs and Disney have been thawing. At the end of last year, Iger struck a deal allowing Disney-produced shows including Desperate Housewives and Lost to be made available for download on Apple's iPod devices.
Pixar's first film, Toy Story, was an unexpected hit. Released in 1995, it was the first full-length computer animated feature and even its producers were uncertain of the audience reaction. It became the highest grossing film of the year and Pixar has proven reliable since. The studios other hits have included Toy Story 2, A Bug's Life and Monsters Inc.
Meanwhile, Disney's traditional hand-drawn animation business, which had undergone a renaissance with the likes of The Lion King and Beauty and the Beast, went into an apparently terminal decline. The company suffered a string of flops including Treasure Planet, Atlantis, Brother Bear and Home on the Range.
At the end of last year, Disney released its first home-grown computer animated film, Chicken Little, which had a lukewarm reception by critics and was a modest box office success.
It made a better-than-expected US$40 million at the US box office in its opening weekend, but still fell far short of The Incredibles' US$70 million. Had Chicken Little been a more resounding success it might have taken some of the pressure off Iger to do a deal with Pixar.
In the last quarter Disney reported a US$313 million loss at its film studio, the result of a poor performance by its Miramax subsidiary and low DVD sales. Iger said at the time it was vital to get the animation division back on track.
According to the Journal, the talks are still at a sensitive stage. If Disney did take over Pixar, however, it would further broaden the influence of Jobs, already one of the world's most powerful media tycoons. It's likely he would join the Disney board while John Lasseter, who directed Toy Story, would take an expanded role looking after the Disney animation studio.
However, the two could still settle on a scaled-down distribution agreement.
Disney declined to comment.