Man Without Qualities

Monday, February 16, 2004

The Fall Of The House Of Eisner VI: The Problem With Michael

Media coverage of the Comcast/Disney takeover story has been curious, to say the least. For example, Reuters has "reported" that Wall Street has been cold toward Comcast Corp.'s bid to acquire Walt Disney Co. Reuter's even goes so far as to quote fund managers holding Disney stock as 'supporting" Mr. Eisner when they observe that they would prefer a higher price:

Many fund managers gathered at Walt Disney World in Orlando, Florida, last week backed Eisner. They said Disney could survive on its own, and balked at Comcast's offer as Disney's quarterly results blew past Wall Street estimates. "I think that is a little low," said Mario Gabelli, chief executive of Gabelli Asset Management.

Of course a fund manager wants a higher price - such a fund is a potential seller of Disney stock. Does Reuters expect the owner of Disney stock to complain to a reporter that the Comcast offer is too high? Is the choice for such people binary: support Michael Eisner or speak against one's own interest?

Even the Wall Street Journal doesn't get market reaction quite right, although the Journal is skeptical:

The Mouse may not fetch as much as its fans are expecting. Shares of Walt Disney Co. have surged 16% since Comcast Corp. unveiled its unsolicited takeover offer Wednesday. The view of most investors: Comcast has made an initial offer, with more-lucrative bids from a bevy of possible suitors surely on the way. But a look at Disney's stock price -- $28 at Thursday's close, up 1.45% -- and at how much value is untapped at the company, suggests investors may be disappointed. Many analysts say it will be hard to get to a price much more than $31 a share for Disney, even after taking into consideration substantial cost savings and additional growth that new management can squeeze out of the entertainment giant. Philadelphia-based Comcast's current stock bid is valued at $23.45 a share at Thursday's closing price.

In fact, that "surge" in Disney's stock price now reflects quite a bit of nearly unfounded "hopes" that more-lucrative bids from a bevy of possible suitors surely on the way - and, if those "hopes" are dashed, Disney stock will decline, making Comcast's bid (or a modestly enhanced version of it) harder to resist. It is unlikely that other suitors will emerge, for the same reason that Disney has not had an offer before Comcast's, notwithstanding Disney's dreadful recent performance: Disney is just too big and has too many evident problems and probably a lot more hidden problems. For example, Disney has long been padding its net revenues by deferring theme park maintenance and investment - to the point where the grime and deterioration is positively embarrassing at Disneyland in Anaheim. That a suitor bearing a much larger check than Comcast's is unlikely can be seen by looking at the list of supposed "likelies:" Viacom, Liberty Media, Pixar, InterActive.

Consider Viacom, just as an example. That Viacom is mentioned at the top of possible "suitor" lists (including the Journal's) itself shows attenuated the hopes that a "suitor" will emerge really are. Viacom already owns CBS, so it would have to shed loss-making ABC. Viacom is a major studio owner, so anti-trust considerations mean it would likely have to shed Disney's studios assets (or its own). The Disney theme parks and merchandising leverage off Disney's studio intellectual property - so that all gets very complicated and messy. Sumner Redstone didn't get as rich as he is by acquiring huge, troubled companies he has to dismember on someone else's schedule (the Justice Department's, in this case). His near-death Blockbuster experience surely provided enough of that flavor.

The other possible "suitors" all have similar problems - with only Pixar perhaps being positioned to do something really creative with Disney's assets. Pixar would need a more financially muscular partner to compete with the Comcast offer. But Pixar also has substantial - although limited - experience working with Disney.

At bottom, Disney has two huge problems: it is a company whose value is ultimately based on intellectual property, where Disney is no longer (1) generating intellectual property in sufficient quantity other than through its now-defunct Pixar venture and (2) refreshing or extending its existing intellectual properties adequately. To these two huge problems may be appended a big third problem: a decreasing ability to exploit existing intellectual property financially. At a minimum. Comcast's management includes people who have demonstrated an ability to fix this third problem. The real advantage Comcast enjoys is that its management comes from Disney and is familiar with Disney's problems and potentials - and knows where the bodies are buried.

Regarding point (2), it is worth noting that most children now do not even have a clear idea of who Mickey Mouse is supposed to be, other than a corporate logo. That is mostly because Michael Eisner has personally blocked all meaningful efforts to refresh or extend Mickey's identity. In a little while, Mickey will be unsalvagable. The same is true of most of the other "classic" (that is, pre-Eisner) Disney characters. For a long time, Disney's best merchandising character has not been Mickey or any of those classic characters, but Winnie-the-Pooh. Even that Winnie-the-Pooh revenue stream is almost certain to be disrupted soon once the eternal litigation (it is the longest-running case in Los Angeles county) in which it has been tied up ends - an end probably distinctly against Disney's interest.

It is Michael Eisner's inability to generate new intellectual property or refresh and extend Disney's existing stock that has created the real crisis at Disney - and the real opportunity for a buyer. Numbers like those cited above from the Journal article don't capture the real problem and opportunity Disney represents at all, or the extent of Michael Eisner's recent failings. Those numbers treat Disney as if it trafficked in natural gas or some other commodity, which is only one part of what Disney really is or needs. Roy Disney understands that. Others may, too. Possibly even Comcast - although the evidence for that is as yet a bit thin.

UPDATE: It's not as if a rejection by Disney of the Comcast offer were ever in doubt. And here it is.

UPDATE: At least some media are beginning to understand that there really isn't any likely suitor out there. The Los Angeles Times seems to have actually counted the chickens:

The odds are long of another company coming to the rescue or storming the Magic Kingdom, analysts and investors say. Some face regulatory hurdles, don't have the money or have little appetite for the kind of mega-mergers that backfired on AOL Time Warner and Vivendi Universal.

Still, with the famous Disney name in play, it's enough to give pause to any media conglomerate or mogul.

"I don't think there are any obvious white knights here," said Lowell Singer, a media analyst with SG Cowen Securities. "But there are certainly some other companies out there who've probably spent more than a couple of minutes contemplating this."

Yes. It takes a little more than two minutes to determine why each of these "suitors' would not be well served by out bidding Comcast ... but not much more than two minutes.

There's a lot more of an opportunity in Disney than media coverage of this offer suggests. If only more market and industry players can figure out that Disney's problems ultimately stem from its recent inability to create and refresh its intellectual property - and only secondarily from problems with financially exploiting that intellectual property, including through distributing it. Mickey Mouse, for example, could be revived - but it would take a real artist with soul and commercial savvy to do it. An artist like Walt. Wall Street operatives and media industry reporters aren't in the business of seeing that kind of potential.

FURTHER UPDATE: Roy Disney and Stanley Gold have really sharpened their focus.

Viacom says: "No, thanks." That didn't take long.

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