Is Yahoo!'s Price Right for Eisner Now?


By Ron Grover The question seems to come up every time Michael Eisner speaks these days: How soon before Disney takes a shot at buying Yahoo!, the Internet portal and former Wall Street darling. The Disney chairman was asked that question in early February, during a meeting in Anaheim with Wall Street analysts. It came up again on Mar. 6, when his company trooped off to Fort Worth to hold its annual meeting.

Both times, Eisner has been fairly vague. To the analyst, he responded that "it's a great company, just overvalued." He told the shareholder that "its financial parameters don't justify its purchase price." Given the Mar. 7 news that Yahoo's earnings for the year would fall far short of estimates and that CEO Timothy Koogle would step down, the question is sure to come up again. (Indeed, I asked the company again about the matter on Mar. 8, it referred me back to Eisner's Mar. 6 comment.)

But Eisner has already made his point: Yahoo! is too rich for his blood. Those of us who have followed Disney for years know one thing about Eisner: He's cheap. Say what you will, he protects Disney's money like it was his own. (Of course, with him holding about 1.2% of the company's stock, according to the most recent proxy statement, that's not too far from the truth.) He doesn't like pulling the trigger on deals that will come back to haunt him. Intimates love to talk about Eisner's "parade of horribles" -- how he forces staffers to run through the downside of every possible deal until they 're all about ready to kick the nearest Disney character in the shins.

JUST A WARM-UP. But the Disney folks do admit openly that they're looking to buy something with all those Disney dollars that are collecting on the company's balance sheet. According to its most recent quarterly statement, Disney has $1.2 billion in cash sitting on its books, a none-too-shabby 42% hike from a year ago. And, as Eisner and Disney Chief Financial Officer Tom Staggs told the analysts and shareholders in recent weeks, that's just the warm-up: Starting in 2002, the company expects to generate more than $2 billion a year in free cash flow, the result of finishing the just-opened $1.4 billion California Adventure theme park in Anaheim. The company's next three parks -- in Paris, Tokyo, and Hong Kong -- are being built largely on someone else's dime, be it the Chinese government's or the Oriental Land Company in Japan.

Now, $2 billion a year in free money sounds like the kind of problem any company would love to have. But the fact is, Eisner is gonna have to spend it somewhere. Sure, he can buy back stock, and the company is doing just that. In the most recent quarter, it bought some $235 million of its stock, the most in years. Such a move shows management's confidence in the stock, but Disney shareholders have grown accustomed over the years to seeing big rises in their stock numbers. Share repurchases ain't gonna do that. I hate to say this, Michael, but it may be time to buy something.

And it looks like Eisner and Staggs know that. Each of them used the "A" word in their recent presentations -- "A" as in acquisition. Eisner mentioned buying either more radio stations, to add to the company's stable of 51 around the country, or TV stations. It now owns 10 affiliates of its ABC network. Both look like good ideas, especially since the Federal Communications Commission seems likely to raise the limits on one company owning TV stations that cover more than 35% of the country.

PASSED-UP PURCHASES. Disney's coverage is now 25%, which gives it a lot of room to buy a major TV station group like, say, Belo. The Dallas-based media company has newspaper and cable assets, as well as 17 stations that cover nearly 14% of the country. Among its holdings are four ABC affiliates, including the one in Dallas, the nation's eighth-largest market.

Disney has passed on several potential investments recently, including General Motors' DirecTV satellite service. That company is likely to go to Rupert Murdoch's News Corp., although talks between the two are said to be faltering. Disney didn't want to get into a bidding war with a guy like Murdoch, who has never seen an acquisition he didn't like. Disney also looked at buying the EMI record label, which has since found its way into the arms of Bertelsmann through a complicated merger arrangement. The issue there was price, at it always is with Eisner.

Given his penchant for penny-pinching, it's ironic his $19 billion deal for ABC looked expensive back in 1996. Now, with the ABC-majority owned ESPN a big money-maker, and Regis Philbin having nearly singlehandedly lifted the network's fortunes, that deal doesn't look so pricey any more. Even Eisner's misadventures with the Internet are being downplayed. The Go network may have been a flop, but he bought it before Internet values began to skyrocket. He got the hot espn.com site in the process. Today, Eisner says the company lost only $150 million on the portal, which it folded in late January, taking writedowns of more than $800 million.

LOADS OF TRAFFIC. Which brings me back to Yahoo!. No doubt, this company has big problems, and it needs an overhaul, or at very least a stronger business plan. According to some observers, it looks to be in the early stages of the el-foldo that has plagued so many other dot-coms before it.

But there's always opportunity in others' misfortunes. The Disney folks, who said openly that Yahoo! was overvalued when it was worth more than $170 billion a year ago, have to love the fact that its value is closer to $12 billion these days.

Moreover, tons of folks still log onto Yahoo! every day. Indeed, according to Media Metrix, it's still the second-largest portal in the business, with some 55 million unique users a month. By comparison, all of Disney's various properties ranked eighth with about 21 million unique users (that includes folks who went looking directly for news on ABCnews.com or sports on espn.com). One of the reasons that Disney folks told analysts that they were getting out of the portal business back in January was they figured that only two or three portals would survive the shakeout, and their own Go network wouldn't be one of them.

THE RIGHT DEAL. Now, Eisner & Co. can own Yahoo!, and it will come at a discount. Sure, some numbers need to be cracked. Disney and Yahoo! executives have been in talks, on and off, for some months. They certainly know one another, and Disney's Harvard MBA-holding financial analysts are almost certainly running and rerunning their spreadsheets even as you're reading this.

Recently, Eisner has waxed about Disney not being "the flavor of the month," a reference to the fact that folks have been hyping the newly merged AOL Time Warner as being what the media company of the future will look like. On the surface, at least, Eisner seems content to let someone else be this month's "flavor." He has been saying all the right things -- how he wants to make the right deal and not simply make headlines.

I believe him. I also believe he's itching to find the right way to spend all those Disney Dollars. Yes, indeed, Michael Eisner may very well want to Yahoo!. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online


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