An Eisner Exit Strategy?


It will start as a pleasant-enough affair. Disney's (DIS) 11-person board of directors will meet for dinner on Apr. 25 at Napa Rose, the upscale eatery at Anaheim's Grand Californian, overlooking Disneyland and California Adventure. But somewhere between the shrimp cocktails and after-dinner brandy, the good cheer is likely to get a bit harder to find.

Chances are it could disappear altogether over the next two days, when Disney's board holds its retreat. Indeed, not since corporate raiders circled the Magic Kingdom in 1984 has the company that Walt built been under such pressure to make some serious changes. Expect a frank, maybe stormy discussion on who should succeed CEO Michael D. Eisner and when the transfer of power should begin.

Two key decisions that could be made at the meeting: whether Eisner's contract, which expires on Sept. 30, 2006, should be renewed and whether the board will push for an announcement that it's stepping up efforts to find a successor for the 62-year CEO to groom.

"LAME DUCK." Sources with knowledge of the board's plans say the nine independent members are increasingly divided over how much control they should take from Eisner, who received a 45% no-confidence vote at the March annual meeting in Philadelphia. That vote caused Eisner to step down as Disney chairman. He remains on the board, but former Maine Senator George J. Mitchell was selected as chairman following the shareholder uprising.

To top it off, just-released voting records show that Eisner received a staggering 72.5% no-confidence vote from shareholders in Disney's own 401(k), most of whom are employees and retirees. That prompted Eisner's chief critics, former board members Roy Disney and Stanley Gold, to say in a statement that the "overwhelming rejection by employees voting their shares" makes it "hard to imagine how Mr. Eisner can do what needs to done at this company without [employees'] support." Disney and Gold have gone so far as to start calling Eisner "a lame duck."

Disney responded by saying the two critics' broadside is "another blatant distortion and manipulation of data," and that with fewer than 9,400 of the 36,000 401(k) participants having actually cast a ballot, the turnout was less than 25%.

YEAREND DEADLINE? Still, the drumbeat against Eisner is unmistakable. "There's no way that the board can extend his contract," says one very highly placed source with knowledge of the board. Of the nine independent board members, he says only two are firmly in Eisner's camp: technology executive Judith Estrin and Father Leo J. O'Donovan, the Georgetown University president emeritus. Others, including Clorox (CLX) Chairman Robert Matschullat and Northwest Airlines (NWAC) Chairman Gary Wilson, are pushing for a more assertive board -- including putting more power in Mitchell's hands.

Matschullat and Wilson are also said to want the board to press forward on a search for a successor to Eisner, perhaps with one in place by yearend. Disney declined to comment for this story, and it didn't make board members available.

Ironically, in mid-May Disney is expected to report strong earnings, thanks to improving theme-park attendance and healthy ad revenues from cable channels like ESPN, SOAPnet, and Lifetime, Disney's 50%-owned women's channel. On Apr. 15, Merrill Lynch analyst Jessica Reif-Cohen raised her earnings-per-share estimate to 22 cents, up from 20 cents. That's a 47% hike over last year's 15 cents.

RATINGS LAGGARD. Still, Disney has lingering problems. In the last six weeks, it has opened three big-budget disappointments at the box office -- Hidalgo, the animated film Home on the Range, and overbudget action film The Alamo. That has prompted most analysts to project that Disney will record write-downs on some of the films, with Fulcrum Global Partners figuring the total could be as much as $100 million.

And on Apr. 20, Disney bit the bullet on its biggest problem to date, its underperforming ABC TV network. ABC has seen ratings fall by 10% this year as it has slid to fourth place, and it trails badly in the race for the 18-34 demographic that advertisers most want

(see BW Online, 4/21/04, "ABC Needs an Apprentice").

Making the 10th personnel changes at the top since Disney bought the network in 1996, Eisner pushed out his two chief TV-show pickers, Lloyd Braun and Susan Lyne, and installed Disney cable chief Anne Sweeney atop the struggling unit. Sweeney brought in Stephen McPherson, president of Disney's Touchstone TV production unit, to the network.

A HARD-CHARGER NEXT? But the momentum is clearly going against Disney: Michael Gallant, an analyst with CIBC World Markets, figures that ABC's woeful ratings are running 9% short of its guarantees to advertisers, meaning it'll likely owe them $132 million in "make-good payments" of either free or cut-rate advertising later in the year.

Will Eisner keep his job? Almost certainly. For how long is another matter. An extension of his contract is likely out of the question. Eisner's continued reluctance to name a successor also probably won't fly. He has said on many occasions that naming his replacement would send a lot of other executives scurrying out the door.

Investors want to see a board taking control from a much-disliked CEO and giving it to a hard-charger. Eisner's No. 2, President Bob Iger, is a possibility. He's regarded as a top-notch manager who frequently has been called to put out fires that Eisner started. But Iger was personally involved in helping to pick ABC's tepid shows -- not exactly the kind of thing you put on a résumé.

BRIEF RESPITE. The best guess among those in the know is that the board will decide to announce it's stepping up efforts to find a successor for Eisner. It could say it has created a committee of independent board members, giving them time to find the right person (think Meg Whitman, the eBay (EBAY) chairman and one-time Disney executive, say some sources).

It's going to be tougher for the board to figure out how to placate shareholders about Eisner's tenure. Board members are hoping that a performance turnaround, which is clearly under way, could be enough to discourage unhappy shareholders from pushing further for Eisner's removal.

That's the tack the board no doubt intends to take in May, when it's scheduled to meet with five pension funds to discuss Disney's still-sluggish share price. Good news on the earnings front should make the pension folks rest a little easier -- but maybe not for long. By Ronald Grover in Los Angeles


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