There’s some distance now between us and all of the excitement. We’ve
had some time since the Comcast bid and the Save Disney rally and annual
shareholder meeting in Philadelphia. It’s even been a couple of months
since I tried to make sense of what was going on with the company.
Quite a bit has happened since March. For starters, the Comcast bid disappeared.
When they realized that the Disney board wasn’t going to make a deal with
them at any price, despite what the board was saying publicly, they canceled
their offer and focused their acquisition efforts on Adelphia Communications,
a troubled cable company attempting to emerge from bankruptcy proceedings,
which is more closely aligned with their core business. Recently, though,
some market analysts have been predicting that Comcast may return with
another bid the next time that Disney appears vulnerable.
The Save Disney team seems to have largely vanished, as well. After they
declared victory following the annual meeting, nothing was heard from
them for some time. They pushed for the early release of the final vote
totals and the totals from the Disney cast member 401K plan, but then
they seemed to let themselves fall out of the spotlight. Even Save Disney
supporter Jim Hill chastised them (link)
for falling down on the job. Their message appears unfocused.
On the news front, Disney completed the purchase of the Muppets assets
from the Jim Henson Company, and announced some projects that are being
tossed around for them. Disney fired the people in charge of ABC (except
for Disney President and Chief Operating Officer Bob Iger, whose mission
the last few years has been to right that sinking ship) and replaced them
with folks from the cable networks side.
Steve Jobs told the New York Post that he would sign Pixar back
up with Disney in a heartbeat if Michael Eisner were no longer running
the company. And let’s not forget that Harvey and Bob Weinstein, the brothers
that sold Miramax Studios to Disney and who now run the studio for Disney,
have made it plain that they are not happy with current arrangements and
are threatening to leave at the end of their contracts.
On the plus side, a California judge threw out the Pooh lawsuit, in which
the Slesinger family claimed that Disney was depriving them of hundreds
of millions of dollars in royalties to which they were entitled.
As far as the business indicators of the Walt Disney Company itself,
ratings for the ABC broadcast network remained in the basement, Hidalgo
and The Alamo both tanked, and Home on the Range had a disappointing
performance compared to expectations. However, the news was not all bad.
In fact, the theme parks division and the ESPN cable network had enough
success to drive the company as a whole to gains exceeding analysts’ predictions
for the second quarter of fiscal 2003-04. Earnings were 26 cents per share,
compared to the disappointing 15 cents per share last year.
Disney predicted a rosy outlook for the year as a whole, though Save
Disney forces noted that in order to make their predicted year-end numbers,
they would merely have to match last year’s performance, indicating that
Disney must foresee no further growth for the remainder of the year. Of
course, to be fair, last year’s third and fourth quarters were powered
by income from the twin juggernauts of Finding Nemo and Pirates
of the Caribbean, and may prove tough to match with no likely blockbusters
looming in that time frame.
Recent happenings
On the heels of the second quarter earnings conference call on May 12,
two more events of interest hit the streets last week. On Monday, Save
Disney’s Stanley Gold listed his short list of candidates to replace Michael
Eisner in an interview with Ron Grover of BusinessWeek magazine
(link),
and on Friday, six members of Disney’s board of directors met with the
heads of seven pension funds, representing about two percent of all outstanding
Disney stock.
First off, who does Stan think is capable of running the company after
Michael Eisner’s departure? Stan played coy by saying, “There are
four or five people who could run this company, but if I told you who
they were, the Disney PR people would only trash them. They all have jobs
and careers, and it would be foolish for me to name them,” but then
confirmed five names presented by Grover.
Gold refused to name the one or two people within the company that he
thought might be capable, but then confirmed short list names as News
Corp. President Peter Chernin, Viacom President Mel Karmazin, Time Warner
chairman of entertainment and networks Jeff Bewkes, Viacom’s MTV Networks
chief Tom Freston (“probably”), and Apple and Pixar Chairman
Steve Jobs. Jobs was the only one about whom Gold expounded at length,
perhaps tipping his preference.
Secondly, what happened at the meeting with the pension fund representatives?
Well, the seven funds met with board Chairman George Mitchell, Company
President and COO Robert Iger, Compensation Committee chair Judith Estrin,
Governance and Nominating Committee chair Monica Lozano, Audit Committee
chair Robert Matschullat, and Aylwin Lewis, as well as non-board member
Chief Financial Operator Thomas Staggs. Michael Eisner, claiming schedule
conflicts, did not attend.
According to press reports, the funds presented concerns including board
responsiveness to shareholders, executive pay and strategic goals, and
pressed for details of succession planning. They also asked the board
to allow them to nominate candidates for the remaining open seat for an
independent director.
According to a statement released by Disney following the meeting, “Among
the items also discussed during the meeting were Disney’s short- and long-term
financial performance and trends, a review of the company’s corporate
governance guidelines including duties for the Chair, director independence,
the Board’s ongoing search for a new independent director, and succession
planning for the CEO and other senior executives.”
In the same statement, Disney touted the fact that its stock rose 29
percent in the last year, increasing 43 percent for the calendar year
2003. Disney also remarked that a $10,000 investment in Disney stock on
the day that Michael Eisner became CEO would be worth $200,000 today.
What it neglected to mention is that it would have been worth about the
same amount on September 10, 2001 before the market dropped, and it would
have been worth about $375,000 in April 2000 and almost as that all-time
high right before the three-for-one stock split in July 1998.
Disney mentioned that the growth since Michael Eisner’s joining the company
in 1984 was 85 percent higher than the S&P 500 index over the same time.
Not mentioned, however, was that the company’s stock has seriously lagged
the S&P 500, the Dow Jones Industrial Average and the NASDAQ index over
the 10 years since the death of Frank Wells in 1994.
The funds managers asked the board to seriously reconsider the status
of Michael Eisner as CEO, but said that they would leave the final decision
in the board’s hands. Sean Harrigan, chairman of the California Public
Employees Retirement System, told reporters “We think there are serious
problems with his leadership.” Mitchell, in a statement immediately
following the meeting, said, “We hope these leaders now have a better
understanding as to why the Board remains firm in its view that the Disney
management team, led by Michael Eisner and Bob Iger, is executing against
its strategic plan.” Somehow, it seems that neither message got across.
What this all means
It appears that Eisner is trying to hunker down and try to pump up the
numbers long enough for the furor to die down so that he can make the
Save Disney team go away, or at least get the media to stop listening
to them—which appears to be slowly happening.
By continuing the “bottom-line first” method of management,
Eisner is concentrating on short-term gains regardless of long-term implications.
This is perhaps best illustrated by Disneyland, which is celebrating its
50 anniversary next year. That calls for an enormous celebration at the
Disneyland park, right? Well, not exactly. Disneyland gets a previously
announced rebuilt—but substantially the same—Space Mountain,
a previously announced Buzz Lightyear’s Astro Blasters attraction, redecoration
of Sleeping Beauty Castle, a new parade, fireworks, a live entertainment
event across the way at Disney’s California Adventure, and an exhibit
about Disneyland’s history. In the meantime, there are lots of rides and
shows slated for all of the other parks around the world for the “global
celebration,” diluting what should be an unprecedented festival for
the original park.
Well, at least there must be Smithsonian-level quantity of material to
showcase in the Disneyland history exhibit. Right?
Well, they do, but they won’t be able to show it to you. Instead of the
huge exhibit enshrined in the Innoventions building as championed by Walt
Disney Imagineering honcho Marty Sklar, who’s been there since the early
days of Disneyland, multiple Eisner budget cuts have shoehorned the exhibit
into the Main Street Opera House, forcing out Great Moments with Mr.
Lincoln, which reopened after an extensive rehab just a few years
ago.
How do you force out a president much-beloved by locals who create a
great furor whenever Abe is threatened? Replace him with a display lionizing
Walt Disney. Now, there’s something that they can’t complain about.
After Lincoln’s been gone for the 18 months of the celebration, just don’t
bring him back. The residents won’t have much of a leg to stand on by
that time.
So the tremendous retrospective honoring a milestone in Americana at
the park itself has been cut from $10 million to $5 million, and finally,
to a paltry $1 million. “Spend as little as you can to keep the rubes
coming in” — sounds like something straight out of P.T. Barnum’s
mouth, but it’s not. It seems to be the strategy being employed by the
head of a much-beloved family entertainment company with a reputation
built on quality and giving the paying customer a great value for the
money spent.
The sad part is that this is exactly what most institutional shareholders
want. They want the most return for their money in the least amount of
time. They don’t usually care about the quality of the product, as long
as it sells. And that’s the audience that Michael Eisner is playing to,
and the only audience that he may need to play to. After all, if nobody
else has enough power to force out his hand-picked directors, why should
he worry? It’s just the institutional investors with enough clout to actually
vote out directors.
What can the average Disney fan do about this? Not a whole lot, except
to make noise to the institutional investors that they may have a business
relationship with, and to vote against the Eisner slate at the annual
shareholder meeting. The individuals don’t have much power in this case.
Is Michael Eisner safe? Yes and no. Save Disney will most likely run
an alternate slate of directors at next year’s annual shareholder meeting.
This may especially threaten Eisner hangers-on like Chairman Mitchell,
second-generation board member Lozano, John Bryson, and others. However,
the institutional investors must continue to be sufficiently dissatisfied
with the company to vote for the insurgents, and if Eisner keeps playing
to them, he might be able to retain the reins of power.
What do I personally think is best for the company? Probably an orderly
and well thought out transition of power to a successor who is chosen
by a board willing to say good-bye to Michael Eisner, and who does not
feel a need to put in someone less than ideal in order to be able to point
out, “See, we were better off with Michael.”
It’s time for Michael Eisner to look toward the door. He had some fabulous
years with Frank Wells (and Jeffrey Katzenberg, and a whole bunch of others),
some above-average years after they left, and finally, some anni horribili.
Should Eisner be out on his patoot immediately? Probably not. A sudden
void at the top with no announced succession plan would be bad for the
company’s fiscal standing, and would probably invite another takeover
attempt. Also, that would leave Bob Iger running the show while a new
CEO was found. If Bob tried to “fix” the company the way that
he’s “fixed” the ABC broadcast network, there wouldn’t be much
of a company left for the new CEO to take over.
Perhaps the best summation of the situation might come from a statement
by California State Controller Steve Westly—who is on the board of
both the CalPERS and CalSTRS funds—following last Friday’s meeting:
“Disney was smart to come to the table today to meet with some
of the nation’s major pension funds. I am pleased that Chairman Mitchell
expressed interest in our proposal for an ad hoc shareholder committee.
This dialogue is critical to finding real answers to the problems at
Disney. For too long, corporate America has said ‘go away’ to the concerns
of investors. And too often, shareholders activists have responded with
a simplistic ‘fire the CEO.’ Neither approach works. What we’re trying
to do is find constructive solutions by pressing for true board independence
and setting a realistic timeline for a transition to the next generation
of management.”
Let’s hope that we get to meet that next generation soon, and that they
get off to a great start.
