Saving Disney PDF Case Study

9-905-014 APRIL 4, 2005 NANCY D. BEAULIEU AARON M. G. ZIMMERMAN Saving Disney The message... was delivered so loud and clear that you could almost hear it echo through th...

9-905-014 APRIL 4, 2005 NANCY D. BEAULIEU AARON M. G. ZIMMERMAN Saving Disney The message... was delivered so loud and clear that you could almost hear it echo through the sprawling Pennsylvania Convention Center: It’s time for CEO Michael D. Eisner to go. Never before in Corporate America have shareholders expressed such an enormous, public loss of confidence in a chief executive.” 1 — The Wall Street Journal, March 15, 2004 In Philadelphia on March 3, 2004, the Walt Disney Company (WDC) was gearing up for what would be one of its most memorable annual shareholder meetings. Chairman and CEO Michael D. Eisner was up for reelection to the board, as were ten other directors. Eisner and the Disney board had faced increasing criticism from shareholders for several years. Part of the criticism came from Disney’s financial performance. Net income had fallen for five straight years in the late 1990s; though it had begun to swing upward, it was still below 1995 levels. The board’s purported lack of independence was another major source of shareholder angst. The directors had a reputation for being “in lockstep behind Michael.”2 After years of trying to change the company from within, two directors, Roy E. Disney (nephew of the late Walt Disney) and Stanley P. Gold, resigned in protest in late 2003. In the months leading up to the March shareholder meeting, they waged an intense public relations battle calling for shareholders to withhold their votes from Eisner and three other directors at the annual meeting. Since there was no alternative slate of directors, Eisner and the board were guaranteed reelection, but by withholding their support, angry shareholders could send a message to the company. In mid-February 2004, Comcast, the largest cable company in the United States, made an unsolicited $48 billion bid to buy Disney, citing poor management among other reasons. The same day, WDC reported strong increases in revenue and net income for the first quarter of 2004. The stock price surged. Disney rejected Comcast’s bid, but the cable giant left the offer on the table going into the shareholder meeting. In the weeks before the meeting, many of the largest state pension funds in the U.S., including California, Florida, New York, and Ohio, stated they would withhold their votes from Eisner. Disney’s board maintained its support for current management. After the vote on March 3, the company announced that of the two billion shares outstanding, an unprecedented 43% had withheld 1 Ronald Grover and Tom Lowry, “Now It’s Time To Say Goodbye,” Business Week, March 15, 2004, p. 30. 2 Joann Lublin and Bruce Orwall, “Disney Dissidents Didn’t Block Moves They Now Criticize,” The Wall Street Journal, February 19, 2004, p. C1. ________________________________________________________________________________________________________________ Professor Nancy D. Beaulieu and Research Associate Aaron M. G. Zimmerman prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney their support for Eisner.3 The board plunged into a five-hour meeting to decide what, if any, action to take in response. The Walt Disney Company4 The Walt Disney Company was known most widely for its classic animated children’s cartoons and films, populated by cultural icons such as Mickey Mouse, Donald Duck, and Snow White. The company was also known around the world for its theme parks and resorts: Disneyland (California), Walt Disney World (Florida), Disneyland Europe (Paris), and Tokyo Disneyland, with Hong Kong Disneyland planned for 2006. WDC, however, was a much broader and deeper media and entertainment company. They owned ABC television studios, several movie production studios (e.g., Miramax, Buena Vista, and Touchstone), a professional hockey team, a publishing business, and the very lucrative ESPN cable sports network. WDC also had a consumer products division that put Disney logos and characters on thousands of items, including apparel, electronics, home furnishings, and breakfast foods. In 2004, the company was divided into four main business lines: Media Networks, Studio Entertainment, Parks and Resorts, and Consumer Products (see Exhibit 1 for financial results by business segment). Humble Beginnings In Hollywood in 1923, Walt Disney started a small cartoon studio bearing his name. In 1928, he dreamed up Mickey Mouse, who would go on to become arguably the most famous cartoon character of all time. Walt’s brother, Roy O. Disney, provided the business acumen behind the studio, while Walt supplied the creative leadership. In 1929, the company changed its name to Walt Disney Productions. In 1937, the studio produced Snow White, the first animated feature film, earning the company $8 million at the box office. Three years later, in 1940, the company went public. The early 1950s saw Disney’s foray into live-action movies and TV. In 1955, Disneyland opened in Anaheim, California, and was an enormous success. Walt began plans for a second theme park, Walt Disney World, and EPCOT Center in Florida. Disney movies continued to do well, and by the time Walt Disney died in 1966, Disney studios had become a significant player in Hollywood. After the founder’s death, the company entered a long internal power struggle to fill the vacuum created by Walt’s death. Roy O. Disney, his son Roy E. Disney, and Walt’s son-in-law Ron Miller, held senior leadership positions at the company, but did not agree on the strategic direction the company should take. As a result, the company eschewed risks and simply tried to guard Walt’s legacy. This strategy was maladaptive to a changing market in entertainment. In the 1970s and 1980s Americans’ taste in entertainment shifted to favor movies like the thriller Jaws, the space epic Star Wars, and the bitter drama, Kramer vs. Kramer. Disney seemed to be out of step as it continued to put out light family-oriented comedies. By 1983, profits had fallen to $93 million from $135 million in 1980.5 Disney simultaneously faced problems in its theme park business. By the time EPCOT center opened in 1982, it had cost $1.2 billion, double the original projected costs. To finance the project, the 3 In 2003, Steve Case resigned as chairman of Time Warner after receiving a 22% no confidence vote at a shareholder meeting. 4 This section draws heavily from Ron Grover’s “The Disney Touch: How a Daring Management Team Revived an Entertainment Empire” (Homewood, IL: Business One Irwin, 1991). 5 Grover, “The Disney Touch,” p. 3. 2 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 company had borrowed heavily and had cut spending on the upkeep of Disneyland and Walt Disney World,. As a result, both parks began to lose some of their luster. This combined with rising gas prices caused attendance to fall; in 1983, attendance at Disneyland was at 1974 levels.6 In the face of all this, Disney executives followed the policies of Walt Disney: never advertise or raise park admission prices. One observer wrote: When filmmaker Walt Disney died in 1966, Walt Disney Co. was run briefly by his brother and then by his son-in-law, Ron Miller. For years, insiders say, every decision was gauged against “what Walt would have done.” The result: a string of profitless, family-oriented movies in a market that demanded racier entertainment. It took an acquisition battle and outside management to resuscitate the company.7 The Rise of Michael Eisner Even though Walt Disney Productions was struggling, the company had an impressive collection of assets, including its film library, theme parks, and real estate. With its languishing stock price, Disney was the target of many investors in the early 1980s takeover frenzy. While the company fought the takeover attempts, one of its biggest shareholders,8 Roy E. Disney, and his business partner, L.A. lawyer Stanley Gold, jumped into the fray. Roy Disney and Stanley Gold had known each other since the early 1970s. Gold recalled, “First I was his lawyer, then consigliore, then employee, then partner.” In 1977, the value of Disney’s stock in the company that bore his name had gone from $80 million to $45 million, “reflecting the erosion in company profits.”9 Disney sought to diversify his portfolio and contacted Stanley Gold. The result was Shamrock Holdings, founded in 1978 and named for Disney’s 52-foot yawl. Shamrock, which began as an investment vehicle for the Roy Disney family, evolved into a successful private equity firm with investors outside the Roy Disney family.10 In 1985, Gold became CEO of Shamrock, while Roy Disney continued as chairman. Disney and Gold felt strongly that the company needed to replace Ron Miller, then CEO. Gold reflected on the condition of the company: Management had fallen apart. They were just lost. From the summer of 1983 to Christmas of that year, Disney shares fell by half. I told Roy that I believed that he needed to decide: sell everything and get out, or use his voice and shares to change management. [Roy’s wife] Patty coined a phrase: “All the way in or all they way out.” So Roy decided to go in all the way. So in February of 1984 we started the campaign to get rid of the old management, and bring in new people.11 6 Ibid. 7 Stewart Toy and Corie Brown, with Gregory L. Miles, “The New Nepotism: Why Dynasties are Making a Comeback,” Business Week, April 4, 1988, p. 106. 8 He owned 1.1 million shares, roughly 5% of the company. 9 Rice Faye, “The Other Disney in the Spotlight,” Fortune, June 5, 1989, p. 161. 10 According to the Shamrock Web site, by 2004, the company had invested $1.5 billion in private equity and $500 million in real estate. 11 Interview, September 28, 2004. 3 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney Roy resigned his board seat as an act of protest, which according to Gold, caused “a lot of consternation.” Miller resigned in September 1984 and Roy came back on the board in time to select a new CEO. There were no clear successors within the company, but there were plenty of other people who wanted the job. Gold and Disney strongly favored a team of Michael Eisner, president of Paramount Pictures, and Frank Wells, president of Warner Brothers. Eisner had earned a reputation as a creative whiz at ABC, then Paramount, where he was credited with a string of box office hits. Frank Wells was a corporate lawyer who had risen through the ranks at Warner. Gold explained why he felt Eisner and Wells should lead Disney: Frank had hired me at his law firm in 1968, then he left for Warner Brothers. He was the mentor, I was his protégé. I had a personal belief that complex organizations are better led by two people than one person. So I thought that Eisner and Wells were a good combo. Eisner was really at the top of his game as a creative executive. He knew pictures, knew story, knew the public’s taste. Frank was well grounded and solid in legal, financial, accounting, mentoring, and growing a team. So I thought they were the right two people to run this thing. The majority of the Disney board, however, favored Dennis Stanfill, the former chairman of Twentieth Century Fox, for his experience running a large public corporation. While Eisner “knew how to pick hit films… he lacked the depth… to run a $1.5 billion company.”12 Stanley Gold and Roy Disney, however, knew that Eisner was “one of Hollywood’s most creative executives” and believed “Disney needed a creative person at its helm.”13 On Roy Disney’s behalf, Gold launched an intense campaign, flying around the country to convince the major shareholders to support Eisner and Wells. Working grueling twenty-hour days, he was ultimately successful. While some of the board still supported Stanfill, they felt it was likely that if he was elected, the shareholders would mount a proxy battle to get a new slate of directors to then fire Stanfill and hire Eisner and Wells. On September 22, just three weeks after Miller’s departure, Michael Eisner was elected unanimously as chair and CEO, with Frank Wells as president and COO. Gold recalled: “They had both wanted to be CEO. Frank wanted to be co-CEO, but Michael refused. Frank, for the good of the cause, said ‘I’ll be COO. But we both report to the board. And if we dispute anything, we’ll go into a room and settle it.’”14 When Eisner and Wells joined Disney, average annual compensation for entertainment executives was about $2 million. The new executives “proposed taking smaller base salaries—$750,000 for Eisner and $400,000 for Wells—in exchange for lucrative bonuses and a spate of stock options.”15 “With earnings down and raiders circling, the board was eager to entice the pair.”16 Eisner was granted options to buy 510,000 shares at the then-current price of $57.44 a share.17 In addition, the board 12 Grover, “The Disney Touch,” p. 23. 13 Grover, “The Disney Touch,” p. 20. 14 Interview, September 28, 2004. 15 John A. Byrne, with Ronald Grover and Todd Vogel, “Is the Boss Getting Paid Too Much?,” Business Week, May 1, 1989, p. 46. 16 John A. Byrne, with Ronald Grover and Todd Vogel, “Is the Boss Getting Paid Too Much?,” Business Week, May 1, 1989, p. 46. 17 Michael Cieply, “Two Disney Directors Who Helped Lead Takeover Defense Are Stepping Down,” The Wall Street Journal, January 16, 1985. 4 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 “offered contracts that included a piece of the action—for Eisner, an annual cash bonus equal to 2% of Disney’s net income in excess of a 9% return on equity.”18 At Disney, Eisner and Wells worked as a team and led a revival at the beleaguered company. Eisner also brought in a fresh team of executive talent. Roy Disney had urged the company to re- focus on its animation division, which he considered to be the company’s “crown jewel.” Disney took the division “under his wing, concerned that the new management would not have the time to develop it.”19 Eventually, Eisner brought in his former colleague from Paramount, Jeffrey Katzenberg, to run the animation studio. Disney animation underwent a rebirth with a string of hits: The Little Mermaid (1989), Beauty and the Beast (1991), Aladdin (1992), and The Lion King (1994). Meanwhile, Disney’s live-action studio, Touchstone Pictures, released several big hits including Down and Out in Beverly Hills (1986), Good Morning Vietnam (1987), Three Men and a Baby (1987), and the groundbreaking Who Framed Roger Rabbit? (1988). Eisner and his team revamped Disney’s theme parks. They raised admission prices by $5 and added several new attractions, including Captain EO, a space-themed ride and movie starring Michael Jackson, and Star Tours, a ride based on the Star Wars films, developed with George Lucas. In 1987, the same year the new attractions opened, Disney spent over $280 million upgrading the parks, double what had been spent the year Eisner was hired. Attendance increased from 31 million guests in 1984 to 36 million in 1987. Park operating margins went from 18% to 30%. The company’s annual cash flow of $1.1 billion allowed it to expand, building a new theme park (Disney MGM Studios in Orlando), hotels, and rides. Eisner led other changes at Disney. He began television advertising and opened retail stores to sell Disney merchandise; by 1990, there were 70 Disney Stores in the U.S. generating $120 million in annual revenue. Michael Eisner had seemingly restored Disney’s financial health and transformed it into a major American brand.20 During Eisner’s first ten years as CEO, annual profits went from $291 million to $1.11 billion and the stock price increased 1300% (Figure A). Figure A Disney’s Stock Price (1984–1994) 18 16 14 12 10 8 6 4 2 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Source: Created by casewriter from data provided by CompuStat. 18 John A. Byrne, with Ronald Grover and Todd Vogel, “Is the Boss Getting Paid Too Much?,” Business Week, May 1, 1989, p. 46. 19 Fay Rice, “The Other Disney in the Spotlight,” Fortune, June 5, 1989, p. 161. 20 Waxman, Sharan. “Facing a Battle, Disney’s Chief is Known to Fight Back, Hard,” New York Times, February 12, 2004, p. A1. 5 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney Eisner and Wells were paid well for their efforts at Disney. In 1988, Eisner and Wells earned $40.1 million and $32.1 million, respectively, in total compensation. A large part of that came from exercising stock options. But with Disney’s ROE at 25%, Eisner’s bonus formula gave him an extra $6.8 million in cash. One writer observed that the total annual haul of Eisner and Wells eclipsed the amount that Tom Watson, Jr., had made over his tenure as head of IBM from 1952–1971. When asked about the design of Eisner’s pay contract, director Raymond Watson said, “I had no idea that it would turn out like it has. But then I didn’t think that our stock would be trading at four or five times what it was when they came in, either.” Watson continued: “Could we have gotten them for a 1% bonus instead of 2% or fewer stock options? I don’t really know. But I know that no one is complaining.” 21 The following year, in 1989, Eisner received a record-breaking two million Disney options. When asked if they were paying too much, Roy Disney replied, “They’re worth every penny of what we’re paying them. I would hate to think where we would be without them now.”22 By the end of the 1980s, after his first five years with the company, Eisner’s total pay amounted to $61.9 million.23 Eisner’s compensation continued to climb through the 1990s. (See Table A.) When he exercised some of his options in 1992 for a payout of $192 million, one observer said “It’s obscene. Nobody’s worth that kind of money.” But the manager of a pension fund that owned a significant amount of Disney stock disagreed, saying Eisner “deserves every penny. He’s the best thing that happened to the company since Mickey Mouse.”24 Table A Compensation for Michael Eisner (1989–1994) 1989 1990 1991 1992 1993 1994 Salary ($) 750,000 750,000 750,000 750,000 750,000 750,000 Bonus ($) 8,800,000 10,480,000 4,690,000 -- -- 7,268,807 Options (Black-Scholes Value at Grant, $) 142,000,000a -- -- -- -- -- Restricted Stock ($) -- -- -- -- -- 2,638,394d Other ($)b 3,520 3,520 3,520 3,520 3,520 3,520 Total 151,553,520 11,233,520 5,443,520 753,520 753,520 10,660,721 Gains from Exercise of Options ($) -- -- -- -- 202,260,592c -- Source: Created by casewriter from. Data for table taken from several sources: Lee Berton, “Executive Pay (A Special Report): Pay Policies—Calculating Compensation: Companies Use a Formula to Compute Executives’ Incentive Pay,” The Wall Street Journal, April 18, 1990, p. R26; “Disney Chairman Gets Smaller Bonus in 1991,” The Associated Press, January 9, 1992; “Fantasyland Payday for Disney CEO,” Business Week, April 25, 1994; and “Eisner’s Pay Drops,” The News & Observer (Raleigh, NC), January 7, 1995. aEisner received 1.5 million options with an exercise price of $68 and 500,000 options with an exercise price of $78. bIncludes various health and insurance benefits. Amounts are estimated based on later data from proxy statements. cEisner exercised options on 5.4 million shares, including some granted in 1984. d60,618 shares of restricted stock at $43.52. 21 John A. Byrne, with Ronald Grover and Todd Vogel, “Is the Boss Getting Paid Too Much?,” Business Week, May 1, 1989, p. 46. 22 John A. Byrne, with Keith H. Hammonds, Ronald Grover, James B. Treece, and Jo Ellen Davis, “Who Made the Most—And Why,” Business Week, May 2, 1988, p. 50. 23 “For Whom Were the Golden Eighties Most Golden?” Business Week, May 7, 1990, p. 60. 24 James Flanigan, “Disney paying for Eisner magic,” Houston Chronicle, December 5, 1992. 6 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 Tragedy Strikes In the mid-1990s, a series of major events occurred at the Walt Disney Company. On Easter Sunday in 1994, Frank Wells was tragically killed in a helicopter crash. Previously, Wells had been viewed as the “numbers guy” while Eisner was the driving creative force behind Disney’s resurgence. Gold reflected on the relationship between Wells and Eisner: “Michael had a good governor in Frank. More importantly, because of Frank’s personality and gravitas, people at the company were devoted to him.”25 Gold remarked later that Wells had “kept Michael’s dark side hidden from other managers.”26 Thirty-six hours after Wells’ death, Jeff Katzenberg asked Eisner for Wells’ position, but Eisner refused.27 While searching for a replacement for Wells, Eisner suffered a heart attack and required emergency bypass surgery. In October 1994, three months after the heart attack, Katzenberg resigned and joined with Steven Spielberg and David Geffen to found the studio DreamWorks SKG.28 Katzenberg sued Disney claiming he was owed 2% of the profits from the films he headed at Disney. The lawsuit was eventually settled and Katzenberg received a $280 million settlement. To help fill the vacancy left by Wells, Eisner brought in Marriott hotel executive Steve Bollenbach as CFO and board member in April 1995. Bollenbach persuaded Eisner that the time was right for a major acquisition. Four months after Bollenbach joined, Disney announced it was buying Capital Cities/ABC for $19 billion in a stock/cash transaction, thus acquiring the ABC television network and ESPN. The deal doubled Disney’s size and Bollenbach was rumored to be a potential successor for Eisner. As part of the deal, Disney gave Robert Iger, president of Capital Cities/ABC a five-year contract to continue running the studio. In the same month that Disney announced the ABC acquisition, Eisner brought Michael Ovitz to the company as president. Michael Ovitz was head of the talent agency, Creative Artists, and according to Eisner, “a close friend and extraordinary executive.”29 Eisner had “struck a deal” with Ovitz while on vacation in Aspen, Colorado, where the two men shared a vacation home. He then informed board member and compensation committee chair Irwin Russell. Russell and fellow member of the compensation committee Raymond Watson hammered out the terms of Ovitz’s compensation ($1 million salary, bonus of us to $10 million, and $100 million in options that vested immediately), then informed the committee’s other members, Sidney Poitier and Ignacio Lozano.30 The hiring was announced in August 1995, and Ovitz began on October 1. Some now thought Ovitz was to be Eisner’s successor. In February 1996, ten months after joining Disney, Bollenbach left to become CEO of Hilton. Eisner released a statement saying, “Steve Bollenbach has spent his entire career preparing for the 25 Interview, September 28, 2004. 26 David J. Jefferson. and Johnnie L. Roberts, “The Magic Is Gone,” Newsweek, March 15, 2004. 27 Eisner reportedly called him a “little midget.” 28 After some early stumbles, churned out major box office hits like Saving Private Ryan (1998), American Beauty (1999), and Shrek (2001). 29 From Eisner’s letter to shareholders in the 1995 Annual Report. 30 Chad Bray, “Ex-Director: Eisner Made Decision to Fire Ovitz,” Dow Jones News Service, November 3, 2004. 7 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney position he has been offered at Hilton. We are sorry to see him leave, but we understand that the unique opportunity to become CEO of Hilton is too attractive for him to turn down.”31 Meanwhile, Ovitz was reported to be having trouble fitting into Disney’s corporate structure and making his ideas heard.32 The relationship between Eisner and Ovitz quickly soured as the two men’s ideas and personalities clashed. “I was cut out like a cancer,” Ovitz later said.33 In December 1996 he left Disney with a $39 million severance payment, plus three million vested stock options worth $100 million. After such a short tenure at the company, Ovitz’s outsized severance package triggered a shareholder lawsuit. With Bollenbach and Ovitz gone, the question of succession was still very much up in the air. In addition to the short-lived presence of Bollenbach and Ovitz, Disney’s board saw other changes. Former U.S. Senator George Mitchell, and Sanford Litvack, Senior Executive Vice President and Chief of Corporate Operations of WDC, both joined the board in 1995. In 1996 the board saw the arrival of Thomas Murphy, former chairman of Capital Cities/ABC, and Leo J. O’Donovan, S.J., president of Georgetown University. Through the late 1990s, more executives left Disney. Steve Burke, the president of Disney subsidiary ABC Broadcasting, left in June 1998. Other departures included top strategist Lawrence Murphy, CFO Richard Nanula (who had replaced Bollenbach) and “TV whiz” Geraldine Laybourne. Time magazine reported, “The losses of Burke and Laybourne were particularly surprising. Burke was considered a favored Eisner protégé, and Laybourne, who before joining Disney turned Nickelodeon into one of the hottest channels on cable, looked like the perfect choice for developing the company’s numerous disparate television properties. So Hollywood is still whispering: Is there trouble in Mouseland?”34 No, answered Burke, who left to run Comcast’s cable operations. “This whole situation is a lot less sexy and nefarious than people believe. Eisner is the most interesting combination of entertainment and business talent in the entertainment business—maybe in any business—and the company still has one of the greatest collections of business talent that I’ve ever seen.”35 In 1997, Disney’s net income hit a high of almost $2 billion. The following year, income declined to $1.8 billion and began a long downward slide. The stock price fell from above $40 to around $25 in one year. (See Figure B and Table B.) 31 Russ Britt, “Disney Executive Leaves; Bollenbach to Head Hilton Hotels Corp.,” Los Angeles Daily News, February 3, 1996, p. B1. 32 Richard Turner and Corie Brown, “Power failure: Michael Ovitz was Hollywood’s most high-voltage dealmaker. Then he went to Disney... and short circuited,” Newsweek, December 23, 1996, p. 34. 33 David J. Jefferson, “A Guided Tour of Disney’s Horrors; On the stand, Michael Ovitz describes a culture of backstabbing and trap doors,” Newsweek, November 8, 2004. 34 Michael Krantz, with Jeanne McDowell, “Disney’s Brain Drain: Some of Eisner’s top executives have shipped out, but the company’s profit machine rolls on,” Time, June 15, 1998, p. 44. 35 Ibid. 8 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 Figure B Disney’s Stock Price (1994–2004) 350 S&P 500 300 Jan 1994 = $100 250 200 150 100 50 Disney 0 Stock 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Created by casewriter from data provided by CompuStat. While ESPN proved to be a strong financial performer, ABC floundered, ranking last among the big three TV networks. In contrast, Eisner did have success with the relationship he formed with Pixar animation studios, headed by Apple’s Steve Jobs. This partnership produced Toy Story (1995), Toy Story 2 (1999), and Monsters, Inc. (2001), some of Disney’s biggest hits. In the early 2000s, a worldwide recession caused a drop in theme-park attendance. In addition, outside of its work with Pixar, Disney’s movies continued to fare poorly at the box office. Net income dropped to $920 million in 2000. Eisner was accused of being “determined to milk the most profit out of Disney with his beloved ‘synergy,’ spitting out endless iterations of existing properties,” and in the process, diluting Disney’s brand.36 Nevertheless, partly due to the ABC television hit game show, “Who Wants to Be a Millionaire,” Eisner received a bonus of $11.5 million. Only $8.5 million was paid out in 2000, with the rest deferred based on future performance. That same year, Eisner exercised options for a gain of $60 million. The question of succession was raised again with the appointment of Robert Iger, who had been running ABC, to the office of president and COO of Disney. As the new number-two man at Disney, the press speculated whether Iger would eventually fill Eisner’s shoes. 36 David J. Jefferson and Johnnie L. Roberts, “The Magic Is Gone,” Newsweek, March 15, 2004. 9 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney Table B Walt Disney Company: Selected Financial Results 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Statements of Income ($ mil.) Revenue 8,531 10,055 12,112 18,739 22,473 22,976 23,402 25,325 25,172 25,329 27,061 Operating Income 1,722 1,972 2,466 3,033 4,447 4,015 3,444 2633 1,283 2,190 2,254 Income before accounting changes 671 1,110 1,380 1,214 1,966 1,850 1,300 920 120 1,236 1,338 Cumulative effect of accounting changes (371) --- -- -- -- -- -- -- (278) -- -- Net Income ($ mil.) 300 1,110 1,380 1,214 1,966 1,850 1,300 920 (158) 1,236 1,267 Net Profit Margin 3.5% 11.0% 11.4% 6.5% 8.7% 8.1% 5.6% 3.6% - 4.9% 4.7% Per Share Earnings 0.55 2.04 2.60 1.96 2.86 0.89 0.62 0.57 (0.02) 0.60 0.62 Dividends 0.24 0.29 0.35 0.42 0.51 0.20 0.21 0.21 0.21 0.21 0.21 Balance Sheet ($ mil.) Total Assets 11,751 12,826 14,606 36,626 37,776 41,378 43,679 45,027 43,810 50,045 49,988 Borrowings 2,386 2,937 2,984 12,342 11,068 11,685 11,693 9,461 9,769 14,130 13,100 Stockholders’ equity 5,031 5,508 6,651 16,086 17,285 19,388 20,975 24,100 22,672 23,445 23,791 Statements of Cash Flows ($ mil.) Cash provided by operations 2,145 2,808 3,510 4,625 7,064 5,115 2,568 3,755 3,048 2,286 2,901 Investing Activities (2,660) (2,887) (2,288) (13,464) (5,901) 5,665 (2,290) (1,091) (2,015) 3,176 1,034 Financing Activities 113 (97) (332) (8,040) (1,124) 360 9 (2,236) (1,257) (1,511) (1,523) Other Common Shares Outstanding (millions) 544 545 530 619 687 2,079a 2,083 2,103 2,100 2,044 2,067 Stockholders (thousands) 408 459 508 564 588 658 842 882 909 995 1,026 Employees (thousands) 62 65 71 100 108 117 120 120 114 112 112 Source: Created by casewriter from Walt Disney Company Annual Reports. aReflects three-for-one split of shares in June 1998. In 2001, Disney acquired Fox Family channel for $5.3 billion ($2.9 billion in cash and $2.3 billion in debt), and renamed it ABC Family. When the network failed to perform, the press concluded that Eisner overpaid. By all accounts, 2001 was a disastrous year. The recession and the terrorist attacks of September 11, 2001 slowed the tourism and entertainment industries. The company posted a $158 million loss and the stock was trading at 1995 levels. Even though Disney returned to profitability in 2002, the company’s woes continued. Its movies bombed and the company’s retails stores were struggling. One bright spot was Disney’s partnership with Pixar. During the summer of 2003, the Disney/Pixar film Finding Nemo had generated $400 million in profit for Disney. At the end of that year, Pixar was under contract to make one more movie with Disney. Ongoing talks to extend the partnership were rumored to be going poorly. It was widely reported that Pixar CEO Steve Jobs disliked Eisner. Questions of Governance As the company struggled, the board came under increased scrutiny. Many questioned whether the directors were independent or qualified. Reveta Bowers was the head of the private school once attended by Eisner’s children. Irwin Russell was Eisner’s personal lawyer. Robert A. M. Stern was an 10 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 architect whose firm had designed many Disney hotels and buildings, including its headquarters. Fr. Leo J. O’Donovan was president of Georgetown University, which had received a $1 million donation from Eisner before O’Donovan joined the board. George Mitchell, former U.S. Senator, was paid for his consulting work for WDC while on the board. Sidney Poitier, the acclaimed actor, had his movies shown on ABC. In 1996, Business Week named WDC to its list of the 25 worst boards in America, noting that despite the company’s 20% increase in stock price that year, five of the eleven board members were insiders and two received fees from the company (see Exhibit 2).37 In 1998, CREF submitted a proxy resolution urging a more independent WDC board, which ended up getting 35.5% of shareholder votes—the highest percentage ever for such a resolution.38 In response to the criticism of the WDC board, the company made changes (see Exhibit 3). In 1998, Andrea Van de Kamp, John Bryson, and Judith Estrin were appointed as outside directors. Eisner also agreed to move from a staggered board to one where all directors would be elected annually by 2001. In addition, Eisner let an anti-takeover poison-pill plan expire and shuffled the members of the audit and compensation committees to include only outside directors.39 Despite these changes, in 1999 and 2000, WDC’s board was listed at the very bottom of Business Week’s annual list of the worst boards in America. From 1998 through 2000, the stock was down 18% and Eisner “steadfastly refused to rid Disney’s board of his many friends and acquaintances.” According to Gold, Eisner “owned the board.”40 Before Andrea Van De Kamp came on as a director in 1998, the Disney company agreed to give $25 million over four years to the Performing Arts Center of Los Angeles for the construction of the Walt Disney Concert Hall, future home of the LA Philharmonic. Van de Kamp was chairman and CEO of the Performing Arts Center.41 George Mitchell “got $2-3 million to take Eisner to Japan to meet the emperor.”42 Mitchell’s law firm was also hired by WDC to do some work for the company to the tune of $442,872 in fees in 2002.43 Tom Murphy was given an office, secretary, and a car and driver for a total cost of $205,150. John Bryson, another director, remained on the board even though his wife was a well-paid executive at the Lifetime cable channel, owned by Disney.44 Many viewed the corporate governance changes as “token gestures.” “Any improvements are a step in the right direction, but Disney has not leaped forward in a brave new direction,” commented Ann Yerger, director of research for the Council of Institutional Investors.45 In 2000, a rift was forming between Eisner and Roy Disney. Disney said Eisner “got annoyed with me,” and attributed the problems in large part “personality issues” and “things I had said to him. Also having the name I have.” Disney, who was vice-chairman of the board, had a weekly lunch with 37 John A. Byrne, with Richard A. Melcher, “The Best and Worst Boards: Our New Report Card on Corporate Governance,” Business Week, November 25, 1996, p. 82. 38 “Timeline: Disney corporate governance,” Newsweek, March 15, 2004. 39 John A. Byrne, “The Best & the Worst Boards: From GE at the top to Disney at the bottom, Business Week rates the panels that run Corporate America,” Business Week, January 24, 2000, p. 142. 40 Personal interview, September 28, 2004. 41 Walt Disney Company’s 2003 Proxy Statement. 42 Stanley Gold, personal interview, September 28, 2004. 43 2003 Proxy Statement. 44 Ibid. 45 Ibid. 11 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney Tom Schumacher, head of feature animation. According to Disney, Eisner “called Tom and said ‘I want to know every thing you talk about with Roy.’”46 In Gold’s opinion, Eisner was “a control freak.” He “barred Roy from a screening in animation in front of 100 people.” In another instance Robert Iger, then president of Disney invited Gold to lunch. “The first thing he says,” remembered Gold, “is ‘I have Michael’s permission to have lunch with you.’” By the end of the 1990s, Gold and Disney had begun to doubt Eisner’s ability to lead the firm. The departure of executive and creative talent, Eisner’s high compensation (see Exhibit 4), and the lack of succession planning concerned them, not to mention the company’s darkening financial picture. Worried, they kept quiet and hoped for improvements. Gold reflected, “We let it deteriorate. I was slow to speak up. In 1998, the problems were apparent, but it was several years before we were vocal.” By 2002, Gold and Disney had mounted an internal campaign on the board to replace Eisner. Gold recalled: We began a series of letters to the board. Then in September 2002 I made an hour-long presentation to the board about the financial problems affecting the company. I was met with dead silence. I did it on a slideshow and had brought a hard copy. Not one person asked for the hard copy, or asked to discuss it. There was no discussion at all. Michael followed it with a non sequitur presentation. As Gold and Disney pressed on with their internal campaign, most of the other directors continued to support Eisner. Gold felt that many of the directors were not qualified for their role. He recalled, “One of the most amazing things I remember was in one of our first executive sessions. Eisner left the room, and I asked the other directors if they knew if we were cash negative or positive. Most of them didn’t know what it meant. I had to explain. I also asked if they knew the difference between box office gross, and distributor’s net. Again, none of them knew.” Roy Disney likened trying to get the board’s attention to “hitting a mule with a two-by-four.” Gold and Disney also challenged the board to begin planning for Eisner’s successor. According to Gold, he had begun pushing for that in 1995 after Frank Wells’ death. “I tried to get the executive committee to talk about it. I met with [Ray] Watson. But Eisner just stalled. Ultimately he came and said, ‘There’s an envelope in my drawer with the name of my successor.’ He didn’t think he was going anywhere.” While Gold and Disney waged their battle behind the scenes, the press noted problems with the Disney company’s leadership. “Disney isn’t so much a company as it is a dynasty,” said one shareholder activist. The Corporate Library, which rated boards on behalf of institutional investors, gave WDC’s board a grade of F and ranked it as one of the ten worst of 1,800 American public companies.47 Institutional investors were also voicing their dissatisfaction at WDC’s performance. WDC’s board remained quiet, publicly stating their continued trust in Eisner’s leadership. Gold said, “Even as the press was criticizing Eisner and the board, Watson comes out and makes a statement that we have best CEO in America, in the entertainment industry. This board just couldn’t do the diagnosis.” Gold described Eisner’s response in the board meetings: We heard very short presentations, with no depth. All we got was anecdotal good news. The more Eisner came under pressure, the more emails we got from him about this and that good thing. No analysis, no bad news. They would begin, “Dear All.” His annual reports were 46 Interview with Roy Disney, September 28, 2004. 47 Marc Gunther, “Disney’s Loss is Eisner’s Game; Michael Eisner has used ‘good governance’ to silence critics,” Fortune, December 22, 2003. 12 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 folksy. At the end it became shtick. He was trying to make board feel real good. And you can get away with that when the people on the board don’t have analytical skills. Gene Kreiger, vice chairman and COO of Shamrock Holdings, who had worked with Gold in the campaign to overturn Disney’s leadership, gave an example of the difficulty in working to change the company from within: The whole Pixar relationship was so visible when they decided not to renew contract. But a year and a half earlier, Stan had challenged the board, “Let’s look at this.” The Pixar contract was about to expire. There was an appearance of difficulty in renewing the relationship. So he asked the board: “How do we fix this? If we can’t, how do we replace it? Do you know how successful this has been?” In this, Stan put out a number, say, Pixar films contributed 56% of the film division’s operating profits. The company took this issue, as well as other issues from the boardroom, and came back four to six weeks later. Their response? “It actually wasn’t 56%; it was 37%.”48 So what they said was, “Your arithmetic is wrong.” But they never addressed the problem. The board had said, “Ask management.” Management gave an answer, but they never addressed problem. The boardroom dynamics worsened. Gold described how Eisner dealt with questions from him and Roy Disney: At the meetings we got put off to the last, you know, “It’s time for lunch.” I think there were people set up to cut off discussion. He got Tom Murphy to scream at me. And he encouraged other board members to come after us. When it became open warfare, he would end most meetings with a demand from the board that they give him a unanimous vote of confidence. We said we won’t. George Mitchell issued a press statement that an overwhelming majority of the board supports Michael Eisner and his management team. In late 2002, Disney restated fourth-quarter earnings after its latest animated release, Treasure Planet, bombed at the box office. The film cost $140 million to make, but only brought in $12 million in its first weekend. In addition, it announced that the SEC was investigating some of the board members who had family members employed at the company. One director under scrutiny was John Bryson, whose wife as an executive for Lifetime Entertainment, a 50%-owned Disney subsidiary. Gold recounted, “The company passed a rule saying you’re not independent if a family member works for the company or a subsidiary. But when they published the rules, without going back to the board, they changed the resolution to say the subsidiary had to be more than 50% Disney-owned. So Bryson was free.”49 The SEC was not so sure. The spotlight on the Disney board grew intense. In response, they brought on Robert Matschullat to the board. Matschullat, former vice chairman and CFO of Seagram, was named head of the audit committee. The board also agreed to have two executive sessions per year without management present. They decided against separating the chairmanship and CEO roles, but George Mitchell was named presiding director. Eisner also promised to reduce the size of the board and increase the role of independent directors. He made good on that promise in January 2003, when the company announced Poitier, Stern, Bowers, and Van de Kamp would not be up for reelection in the March 2003 annual meeting. Sarah Teslik, executive director of the Council of Institutional Investors, said 48 Percentages are estimates. 49 Stanley Gold, personal interview, September 28, 2004. 13 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney “The governance changes all go in the right direction... and we would like to see more improvement.” Some in the press, however, questioned whether the corporate governance moves reflected a true shift in the company’s attitude: “Eisner may still be able to dominate the board by virtue of his powerful personality and the latitude in the rules which are in some cases open to interpretation.”50 After her ouster, Van de Kamp claimed, “Michael has used the shield of corporate governance to get rid of people who were not in his pocket.”51 Gold echoed this sentiment: Bowers was shown the gate when she once voted with us. They used a trumped up conflict of interest charge. Her school is a well-respected grammar school. Eisner’s kids had gone there, he’d given money. [President Bob] Iger and [CFO Thomas] Staggs wanted their kids to go there. Eisner leaned on her to put them in the school. She had a building campaign going and he agreed to give $300 thousand or so. Then Eisner said, “You’re taking money from my execs. So you’re fired.” He got rid of Andrea Van de Kamp for the same thing. Despite the changes on the board, Gold and Disney stuck to their message: Eisner had to go. At the end of November 2003, the board informed Roy Disney that he would not be put up for reelection at the upcoming shareholders meeting. The reason given was Roy’s age. A few years prior, the board had adopted a policy that directors could not be over 72 years old. Roy Disney was 73. Disney knew he was being forced out for other reasons since the age restriction did not technically apply to him. The policy applied only to non-executive directors.52 Because he was vice chairman of the board, Disney qualified as an executive director. Disney decided to resign. He recalled, “I didn’t have much of a choice. I came home from Pasadena after the meeting. I sat down and started talking about how to deal. I didn’t see any alternative other than to turn around and say, ‘Screw you.’ It then just became a question of writing the letter.” He submitted the letter on November 30. (See Appendix A for the text of the letter.) On December 1, Gold followed suit and resigned. “I would have been next,” he reasoned. “Eisner had already stripped me of being on the compensation committee and the nominating committee.” Eisner had argued that Gold was not independent under the new Sarbanes-Oxley legislation, since Gold’s daughter worked for WDC. “Ultimately the SEC said that emancipated children that don’t take executive roles, which my daughter didn’t, don’t disqualify a director from being independent.” Gold was then deemed non-independent since he worked for Roy Disney. In his resignation letter, Gold wrote, It is clear to me that this board is unwilling to tackle the difficult issues I believe this company continues to face—management failures and accountability for those failures, operational deficiencies, imprudent capital allocations, the cannibalization of certain company icons for short-term gain, the enormous loss of creative talent over the last years, the absence of succession planning and the lack of strategic focus.53 (See Appendix B for text of letter.) 50 Peter Henderson, “Analysts say proof of Disney reforms yet to come,” Reuters News, December 4, 2002. 51 Marc Gunther, “Disney’s Loss is Eisner’s Game; Michael Eisner has used ‘good governance’ to silence critics,” Fortune, December 22, 2003. 52 The policy did apply to Thomas Murphy and Ray Watson, who were also not put up for reelection. 53 Gary Gentile, “Second Disney director quits, joins Roy Disney as Eisner critic,” Associated Press Newswires, December 1, 2003. 14 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 After Gold’s resignation, the Disney board met for two days in New York. They released a statement in support of Eisner. They also announced that John Chen, head of software firm Sybase, was being asked to join the board as an independent non-executive director. They soon announced that Aylwin Lewis, YUM! Brands president, would also join the board. The Save Disney Campaign The same day he resigned, Gold appeared with Roy Disney on Fox News, CNN, and CNBC to explain their frustrations with the Disney company. On Fox, Gold said, “We’ve spent two years trying to work within the boardroom to effectuate change, and we’ve basically come up against a brick wall. And I think that we can be more effective by talking to people on the outside.” Some observers initially discounted the move by the dissident directors, saying Roy was upset over having to leave the board due to the age restriction. They pointed out that Disney’s financial performance seemed to be improving. Others questioned whether Roy Disney was the best person to judge the performance of the company: With a breezy manner, a kind face and an early resume of minor studio jobs, Mr. Disney over the years has been routinely disregarded as a lightweight heir and widely derided behind his back as “Walt’s idiot nephew.” Long absences from the company’s Burbank, Calif., headquarters, to sail in yacht races or visit his castle in Ireland, have only fed that notion. His opinions have sometimes missed the mark. He criticized Disney’s attempts to revive its consumer-products division, for example, by marketing its princess characters, such as Cinderella and Snow White, as a group. The “Princess Line” is now one of Disney’s hottest marketing conceits.54 Nevertheless, Roy Disney and Stan Gold were committed to removing Eisner. They quickly began making plans. “Somewhere in these conversations,” remembered Disney, “the idea came up to launch a website.” Around this time, Democratic Presidential Candidate Howard Dean had been enormously successful in using the Internet to raise campaign funds and attract supporters. Gold and Disney saw great potential in using the same medium to get their message out. Gold explained: “We took the playbook of Howard Dean—how to energize a base that wants an outlet to voice dissatisfaction.” Disney described what they did next: “We grabbed a site name and put our pictures and resignation letters on it and said ‘Coming soon.’ Then we found a web designer and manager and had the site up and running by January 1.” SaveDisney.com was born. The volume of the response was tremendous. Thousands of emails poured in (see Appendix C for examples). Disney artists volunteered to draw anti-Eisner cartoons, some of which were posted on the site. The Disney corporate offices reacted with “total paranoia,” Roy Disney recalled. The SaveDisney.com website was blocked so that Disney employees could not access the site. Emails sent from Disney offices to email addresses at Shamrock were bounced back. But current and former Disney employees, as well as Disney fans from around the country, still sent messages of support for Gold and Disney’s campaign. “Not only were we able to round them up and give them a voice,” said Gold, “But we also got something from them, we got energy. The letters, the encouragement. For them, they cared about the quality of product, the maintenance and service at the parks, the fact that the company had cut back on health benefits.” 54 Bruce Orwall, “Of Mice and Men: In Disney Row, an Aging Heir Who’s Won Boardroom Bouts—Often Viewed as a Lightweight, Walt’s Nephew Challenges Eisner, a Corporate Warrior,” The Wall Street Journal, December 5, 2003, p. A1. 15 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney One man wrote to Roy Disney, “I want to lend my full support to your ‘Save Disney’ cause. Although my wife and I have only about 100 shares to pitch in and that unfortunately does not add up to much voting power, I am interested in finding out if there are any other things I can do besides voting my shares to help out.”55 Another wrote: The Walt Disney Company, the board of directors has the responsibility of preserving something that simply does not exist anywhere else. I am referring to “Disney magic.”56 I know that may sound corny to a lot of people, but perhaps they don’t get it. That “magic” does not exist anywhere else in the world.... In recent years, we have seen the downhill avalanche of [the company]. It is obvious in the theme parks, stores, merchandising, movies, and every other product… Michael Eisner has raped the company, squeezing the dollar at the expense of quality, while accepting enormous bonuses.... Bottom line is that [Eisner’s] greed and the lack of backbone of the remaining board members is sucking the life out of Disney. The Road Show Using the website, Gold and Disney began a campaign to get shareholders to withhold their support from Eisner and the slate of directors at the upcoming shareholder meeting. Gene Krieger, vice chairman and COO at Shamrock, was involved with the planning. He explained: First of all, we couldn’t have a typical proxy contest. We did not have sufficient time to develop an alternative slate of directors. Eisner would get reelected whether he had 80% or 10% of the votes. So we just wanted to send the strongest possible message. We were looking for as many shares as possible to join our position to withhold their support for the reelection of Eisner and three other directors: Estrin, Mitchell, and Bryson. Disney’s shareholders were 35% retail (“mom and pop”) investors, 55% institutional investors, and 10% pension funds. From the response to the website, it was clear that Gold and Disney had the support of the retail investors. But they knew that to put enough pressure on the board to unseat Eisner, it would take more than a populist campaign. They had to go to the major shareholders. Gold, Disney, and a small team from Shamrock began traveling around the country to meet with representatives from pension funds and institutional investors. According to Gold, almost everyone they talked to agreed with their diagnosis of the company’s problems. “They knew performance was down. Also they knew Eisner’s micro-management style had chased away a lot of good people. So we talked to them about business, performance, and governance. We had been picked as one of worst boards for several years in a row. It’s hard not to notice that.” Krieger explained that they were “able to make a case that was well grounded in facts as they were known. We got people to look at this as a shareholder.” But getting them to withhold their support in the proxy vote was harder. “It’s too easy for institutional investors to sell shares and buy something else,” Gold explained. “Unless they’re really wed to the product, you can’t get them to do it. In order to have a resounding campaign, people have to care about the company.” 55 Correspondence provided by SaveDisney campaign at Shamrock Holdings. 56 In 2003, Eisner gave an interview explaining his philosophy about creating the Disney “magic”: “Magic is about deception.” His spokesperson advised him to use the word “create” in place of “deceive,” but Eisner refused to change his wording: “No, but it’s creative deception.” Eisner’s goal was to keep costs down while not detracting from consumers’ experience with Disney products. “In a [Disney] ride, if you turned around, which you would never do, you would see unfinished backs of a lot of things. Our whole job is to deceive you into having a good time.” One shareholder took another view: “the deterioration in the appearance of the parks is awful.” See David J. Jefferson and Johnnie L. Roberts, “The Magic Is Gone,” Newsweek, March 15, 2004. 16 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 Mike McConnell, managing director of Shamrock Capital Advisors (a division of Shamrock Holdings), commented on a potential strategic mistake by the board that led institutional shareholders to withhold their support: “The [Disney] board didn’t do a good job in letting management lead the relationship with shareholders. For example, with the public pension funds, there was arrogance from the company. It came from the management team. The board didn’t own the communication with shareholders. In a situation like this, you would think you’d want ownership of that.” The Comcast Bid As the SaveDisney campaign was getting off the ground, the Disney talks with Pixar exploded. On January 29, 2004, Disney reported that the negotiations had concluded and that the Walt Disney Co. had ended their relationship with Pixar. The negative publicity surrounding the divorce in January 2004 was huge. Less than one month later, in mid-February 2004, Comcast, the nation’s largest cable company, made an unsolicited $48 billion bid to buy the Walt Disney Company. Comcast’s CEO, Brian Roberts, wanted to expand into “content,” media that it could distribute over its cable lines. He had already bought Home Shopping Network, and wanted the premium content that Disney possessed. But Roberts also saw that Disney was on the ropes. Even though Gold and Disney did not support the Comcast bid, the SaveDisney team felt that it validated much of what their campaign had been arguing. “When Comcast said they wanted to buy the company,” recalled Krieger, “they listed their reasons. They all supported our position.” He continued: I believe Comcast saw this as an opportunistic situation. The company had poor performance. The board was not likely to make a change. Also, they were being distracted and challenged by us. So Comcast made an opportunistic move. Remember, in their press conference, their press material outlined significant performance weaknesses. The same ones we had been talking about. ABC’s performance, low ROI, low ratings. They were seizing on the same basic things we were. Krieger described the situation facing the Disney board: “You’re the board trying to put on a bulletproof vest against Gold and Disney, but you have other people trying to pierce the armor.” Until the Comcast offer, the board “thought they were fine.” He elaborated: They thought they had a succession plan. It wasn’t urgent. I don’t think they were ever fundamentally engaged in the real tough issues. But when Comcast came, it raised a lot of issues and developed a list of options that the board had to get more engaged in. Previously, they were very dismissive. “Everything will blow over.” As important as Pixar was, and they were on the defensive, they didn’t make a decision. They said that Steve Jobs was asking too much from shareholders. But by the time Comcast goes public, then directors are really in the spotlight. Then it gets more complicated. There was a lot of controversy over what involvement the board had and when, in terms of when Comcast made an offer. Roberts called Eisner, who blew him off without checking with the board. Only later did Comcast go public with their offer. In subsequent responses, the board said Eisner had already received instructions on how to act from the board, because they anticipated the call. How? And what did they give instructions on? There was no price on the table. At some point, you think the board would have begun to see the possibility of exercising their responsibility. But it wasn’t until really the Comcast thing that the board had a responsibility. Then they had to manage the press, the takeover defense, etc. 17 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney The same day the Comcast bid was made public, Disney released their results for the first quarter of 2004. Net income hit $688 million (33 cents per share), up significantly from $36 million (2 cents per share) one year earlier. Quarterly revenue for the company as a whole was up from $7.7 billion to $8.55 billion. All four of Disney’s business segments had improved. Revenue from theme parks and resorts showed a 5% increase to $1.6 billion, with park attendance levels up at Walt Disney World. The broadcasting segment had a 6% increase in revenue to $3.1 billion, with costs down and ABC pulling in more advertising dollars. With the closings of several hundred Disney Stores and increased sales, the consumer products segment had an increase in revenue of 7% to $840 million. But studio revenues had shown the biggest increase, up 57% to $3 billion. Most of this was due to DVD and video sales of two summertime hits, Finding Nemo (with Pixar) and the live-action film Pirates of the Caribbean.57 Eisner called the results “tremendous” and stated that he expected earning to increase 30% in fiscal 2004. He continued: Our recent performance provides strong evidence that we are on the right course and beginning to reap benefits of the steps we have been taking and are taking over the last several years to position the company for renewed growth. It appears that we are pulling out of the shadow of the economic downturn of the last two years and the post-9-11 decline in tourism. Disney has prepared for the turnaround by building a stronger asset base than ever throughout our company.58 One analyst commented, “They really blew away our estimates,” but cautioned, “It’s primarily due to the DVD sales, so it’s not going to be duplicated in the foreseeable future because the release schedule has been a bit weak since the summer.” He was referring to several box office bombs like Cold Creek Manor and the mediocre results of Brother Bear.59 Looking ahead, however, Eisner believed that, “Given the strength of our brands and other assets and the strategies we have in place, as we look out several years beyond 2004, we are targeting double-digit compound growth in our earnings through at least 2007.” 60 After posting the strong financial results, Disney’s share price was trading around $28, up from a low of $15 in September 2002. Less than a week after Comcast announced their offer, the Disney board rejected the bid. Comcast, however, left the offer on the table. The Annual Shareholder Meeting As the shareholder meeting in Philadelphia neared, several institutions weighed in on the performance of Disney and the board. In early February 2004, ISS came out against Eisner, advising shareholders to withhold their support for his reelection. On February 24, the Delaware Chancery Court unsealed the records pertaining to the shareholder lawsuit against Disney surrounding the $140 million severance package of former Disney president Michael Ovitz. The shareholders maintained that Eisner hired Ovitz “over the objections of some 57 Greg Hernandez, “Disney Earnings Rise Dramatically,” Los Angeles Daily News, February 12, 2004. 58 Ibid. 59 Ibid. 60 Ibid. 18 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 board members and negotiated his contract and termination deal with little board input.”61 Disney had requested that the court keep the records sealed until March 2, the day before the shareholder meeting. Chancellor William B. Chandler rejected the request and wrote in his decision, “It appears to me that you seek to sanitize the public record, effectively maintaining a cloak of secrecy with respect to certain testimony and documents concerning conduct of Disney officers and directors.”62 The case was scheduled to go to trial in late 2004. The day after the lawsuit records were unsealed, Glass Lewis, another independent proxy advisory firm, stated, “The Disney board has been notoriously insular, famously gullible and blindly loyal to Mr. Eisner.” Much of Glass Lewis’s report was based largely on the records of the Ovitz case. They endorsed withholding support from Eisner, Wilson, and Mitchell. In response, the Disney board called the statement by Glass Lewis a “side show” and called it an effort by an “upstart company that is trying to grab publicity.” The Disney statement continued by claiming that Glass Lewis’s report “diverts attention from the fact that Disney’s record for building value is indisputable and that it is a well-managed company with world-class governance and a laser focus on building shareholder value that is on track for earnings growth from continuing operations in excess of 30% this year and double-digit growth through 2007.”63 The same day that Glass Lewis released its report, Calpers, the nation’s largest pension fund (and Disney’s twenty-ninth largest shareholder) said it agreed with Glass Lewis and would also withhold support from the board’s audit committee, which had allowed the auditor to also perform consulting services.64 A Disney spokesperson said the company’s audit procedures were “beyond reproach” and that the board disagreed with the pension fund’s view of Disney’s leadership.65 Calpers’ statement, however, set off a “pension fund revolt against Eisner.” The next in line was the $118 billion New York State Common Retirement Fund, who also said they would withhold support from Eisner. Alan Hevesi, New York State Comptroller stated: Under Michael Eisner’s management, Disney has not performed well over the last several years. His tight control over Disney decision-making and his role as both CEO and chairman of the board call into question his commitment to corporate governance reforms. Allegations that the board, under his leadership did not reveal the Comcast bid to shareholders, complicates his record. I call on Disney directors to separate the positions of chairman and chief executive and to replace Mr. Eisner as soon as possible.66 After New York’s statement against Eisner and the Disney board, Connecticut, Florida, New Jersey, Massachusetts, North Carolina, Ohio, and Virginia quickly followed, publicly stating they favored withholding support from Eisner.67 61 Frank Ahrens, “Disney CEO Ignored Board, Lawsuit Says; More Support Given to Drive to Withhold Shareholder Votes,” The Washington Post, February 26, 2004, p. E01. 62 Ibid. 63 Ibid. 64 Peter Henderson, “Calpers, investor adviser oppose Disney’s Eisner,” Reuters News, February 25, 2004. 65 Ibid. 66 Arden Dale, “Eisner In Sights of Growing Number of Pension Funds,” Dow Jones News Service, February 26, 2004. 67 Greg Hernandez, “Board Urges Support for CEO Eisner; Shareholder Letter Precedes Meeting,” Los Angeles Daily News, March 2, 2004, p. B1. 19 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney At an investor conference earlier in the year, director George Mitchell had been asked if Disney would separate the CEO and chairman positions. He replied it would not happen until 2006.68 On February 28, the board held a teleconference and debated whether they should separate the chairman and CEO jobs to quiet some of the controversy.69 Under the terms of Eisner’s employment agreement (which the board had renegotiated in 2000), if the chairman and CEO positions were split, Eisner had the right to terminate his employment for “good reason” within sixty days. If he were to do so, Eisner “was entitled to receive post-termination annual bonuses for the full remaining term of the agreement [which was until September 30, 2006] and the 24-month period thereafter.” Each post- termination bonus would be the average of the three highest bonuses in the prior four years, or $6 million, whichever was higher. All of Eisner’s options would vest and remain exercisable for five years. He would also receive a cash payment “equal to the present value of the remainder of the salary and to the bonus payments,” as outlined in his contract.70 The board could not reach a decision, and agreed to meet again the night before the shareholder meeting. Leading up the meeting, the board maintained its support of Eisner (see Exhibit 5 for a description of the board in 2004). On March 1, they released a letter to shareholders urging support for the CEO. They pointed out the company’s strong performance in 2003, saying it reflected “the business, financial, and creative direction of Disney under the leadership of Michael Eisner and his management team. Your board believes the company’s current structure and strategy will maximize shareholder value.”71 Gold and Roy Disney stated that they hoped 20% of shareholders would side with them. If they got over 35%, they would have enough votes under a proposed SEC regulatory change to put up an alternate slate the following year. Jack Liebau, the fund manager of Liebau Asset Management, said that if they got “more than 35%, I think they could claim victory, and that could embolden Comcast to make another bid or become hostile.” Lieabau’s fund owned Disney stock and supported the company’s management. 72 On March 2, Gold and Disney published a letter in the Financial Times calling for Eisner’s removal. That afternoon, Disney president Bob Iger appeared at a press conference and called SaveDisney a “campaign of misinformation and distortion.” He pointed out that Disney’s stock was up 60% for the year and expected “double-digit growth into 2007.”73 That night, Roy Disney and Stan Gold held a meeting in the ballroom of a hotel near the site of the shareholders meeting. The goal was to “rally the troops” in opposition to Eisner. Over 1,000 supporters showed up, with over 600 waiting outside to get in. 74 Those who made it inside “were rewarded with multicolored goody bags featuring bumper stickers and T-shirts bearing the logo 68 Laura M. Holson, “Eisner Vote Forces Disney to Catch Up,” The New York Times, March 10, 2004, p. C5. 69 Ibid. 70 2003 Disney proxy statement. 71 Greg Hernandez, “Board Urges Support for CEO Eisner; Shareholder Letter Precedes Meeting,” Los Angeles Daily News, March 2, 2004, p. B1. 72 Peter Henderson, “Calpers, investor adviser oppose Disney’s Eisner,” Reuters News, February 25, 2004. 73 Frank Ahrens, “Changes in the Air at Disney Co.; As Shareholders Meet in Philadelphia, Management Faces Revolt,” The Washington Post, March 3, 2004, p. E05. 74 Phyllis Furman, “Foes Rally Against Eisner,” New York Daily News, March 3, 2004, p. 47. 20 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 savedisney.com.”75 When Roy Disney took the stage, he was greeted with wild applause. His calls for Eisner’s departure were greeted with more clapping and whistling. “‘Let’s bring back the magic,” a teary-eyed Roy Disney told the rapt crowd. ‘Management has failed miserably in giving value to shareholders.’”76 Gold followed him on stage saying that if 20% of shareholders withheld support, it would send a clear statement that Eisner’s time had run out.77 Gold pledged, “We’re not going away until Michael Eisner is gone. We’ll be here next week, next month, next year.”78 When the votes were announced, 43% of shareholders had withheld their votes for Eisner’s reelection to the board. Another 25% had withheld support for Mitchell’s reelection, 23% for Estrin, and 22% for Bryson.79 Since there was no other slate, Eisner and the other directors were all reelected to the board. But the shareholders had spoken. 75 Bruce Orwall, and Brian Steinberg, “Disney Meeting: New Adventures In Dissidentland,” The Wall Street Journal, March 3, 2004, p. B1. 76 Phyllis Furman, “Foes Rally Against Eisner,” New York Daily News, March 3, 2004, p. 47. 77 David Teather, “Roy Disney and dissidents redraw Eisner’s future,” The Guardian, March 3, 2004, p. 20. 78 Miriam Hill, “Eisner foes vow to continue Disney fight,” The Philadelphia Inquirer, March 2, 2004. 79 After the final ally of the votes, it was determined that 45.37% had withheld support from Eisner, 25.69% from Mitchell, 24.37% from Estrin, and 23.96% from Bryson. 21 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited.  905-014 -22- Exhibit 1 Walt Disney Company: Results by Business Segments 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Segment Revenues Media Networks 8,012 9,836 9,569 9,733 10,941 Filmed Entertainment 3,673 4,793 6,002 Broadcasting 4,142 6,522 7,142 Studio Entertainment 6,176 6,011 6,106 6,691 7,364 Parks and Resorts Parks and Resorts Parks and Resorts 6,141 6,809 7,004 6,465 6,412 Consumer Products 1,415 2,151 2,151 Creative Content 10,095 10,937 10,302 Consumer Products 3,126 2,762 2,590 2,440 2,344 Total Revenues 8,529 10,408 12,112 18,739 22,473 22,976 23,455 25,418 25,269 25,329 27,061 Segment Operating Income Media Networks 1,512 1,985 1,758 986 1,213 Filmed Entertainment 622 856 1,074 Broadcasting 747 1,294 1,325 Studio Entertainment 162 126 260 273 620 Parks and Resorts 1,494 1,615 1,586 1,169 957 Consumer Products 355 426 511 Creative Content 1,596 1,882 1,403 Consumer Products 592 386 401 394 384 Accounting Change (300) - - Gain on Sale of KCAL 135 - Total Operating Income 1,725 1,966 2,446 3,033 4,447 4,015 3,760 4,112 4,005 2,822 3,174 Source: Created by casewriter from Walt Disney Corporation Annual Reports. This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. Saving Disney 905-014 Exhibit 2 1996 Board of Directors, Walt Disney Company Director (Age) Joined Description Stock Ownership Sole Shared Voting Voting and and/or Acquirable % of Investment Investment within 60 Common Power Power Days Stock Reveta F. Bowers (48) 1993 Head of the School of the Center for Early -- -- 1,200 * Education. Member of the board of the National Association for Independent Schools. Roy E. Disney (66) 1984 Vice Chair of the Company since 1984. 5,658,230 1,764,256 80,000 1.1% Director from 1967 through March 1984. Rejoined the board in September 1984. Chair of Shamrock Holdings. Michael D. Eisner (54) 1984 Chairman and CEO of the Company. 2,934,180 99,455 6,666,668 1.4% Previously president and COO of Paramount Pictures. Stanley P. Gold (54) 1987 President and CEO, Shamrock Holdings. 1,000 1,856 1,200 * President of Shamrock Capital Advisors. Chairman of LA Gear, Inc., and Koor Industries. Sanford M. Litvack (60) 1995 Sr. Exec. VP and Chief of Corporate 500 700 350,000 * Operations of the Company. Served as Sr VP and General Counsel from 1991–1992, and Executive VP of Law and Human Resources from 1992–1994. Ignacio E. Lozano, Jr. 1981 Chair of Lozano Enterprises, publisher of La 5,148 440 1,200 * (69) Opinión, the largest Spanish-language paper in LA. Publisher and editor of La Opinión,1953– 1986. U.S. Ambassador to El Salvador, 1976– 1977. Director of Bank of America Corp.; Southern California Gas Co.; and Pacific Mutual Life Insurance Co. George J. Mitchell (63) 1985 Special Counsel to law firm Verner, Liipfert, 500 - 1,200 * Bernard, McPherson and Hand in Washington, DC. U.S. Senator from 1980–1995. Director of UNUM, Federal Express, and Xerox. Thomas S. Murphy (71) 1996 Chairman and CEO of Capital Cities/ABC, Inc., 1,048,544 17,830 205,238 * from 1966–1990, and 1994–1996. Director of Johnson & Johnson and Texaco. Member of the Board of Overseers of Harvard College. Richard A. Nunis (64) 1981 Chairman of Walt Disney Attractions. Director 89,097 14,430 440,000 * of SunTrust Bank and Florida Progress Corp., holding co. of an electric utility. 23 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited. 905-014 Saving Disney Director (Age) Joined Description Stock Ownership Sole Shared Voting Voting and and/or Acquirable % of Investment Investment within 60 Common Power Power Days Stock Leo J. O’Donovan, S.J. 1996 President of Georgetown University. Chair of - - - * (62) the Consortium on Financing Higher Education; director of Riggs National Bank, Nat’l Council on the Arts, and Assn. of Catholic Colleges and Universities. Sidney Poitier (69) 1994 Actor, director, and writer. CEO, Verdon-Cedric - - 1,200 * Productions, a film production company. Member, Children’s Defense Fund and NAACP Legal Defense and Education Fund. Irwin E. Russell (70) 1987 Private attorney specializing in the 4,000 - 1,200 * entertainment industry. Director of the Lipper Funds, Inc. Robert A. M. Stern (57) 1992 Senior Partner and founder of Robert A. M. 260 - 1,200 * Stern Architects of New York. Professor of Architecture at Columbia University. Architect ofseveral hotels at the Company’s resorts and the Feature Animation Building at the Company’s headquarters. E. Cardon Walker (80) 1960 Chairman and CEO of the Company from 158,573 - 1,200 * 1980–1983. President from 1971–1977. From 1984–1989, consultant to the Company. Raymond L. Watson 1974 Vice Chair, the Irvine Company, a land 17,040 - 1,200 * (70) development firm. Chair of the Company from May 1983-Sep. 1984. Director of Pacific Mutual Life Insurance and Mitchell Energy & Development Co. Gary Wilson (56) 1985 Co-chairman of Northwest Airlines. Exec. VP - - 1,200 * and CFO of Northwest from 1985–1989. Previously, Exec. VP and CFO of Marriott Corp. Source: Created by casewriter from company proxy statements. *Negligible. 24 This document is authorized for use by Kelvin Conyers, from 2024-12-30 to 2025-03-30 in the course: FI 8320: Corporate Financial Strategy for Innovation - Ryan (Spring, 2025) , Georgia State University Any unauthorized use or reproduction of this document is strictly prohibited.  905-014 -25- Exhibit 3 Composition of Disney’s Board of Directors (1991–2003) (Sorted by date joined) Director 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Disney, Roy E. E E E E E E E E E Eisner, Michael D. Ch Ch Ch Ch Ch, E Ch, E Ch, E Ch, E Ch, E Ch, E Ch, E Ch, E Ch, E Ch, E Lozano, Ignacio E. , Jr. Aa, C Aa, C, P Aa, C, P Aa, C, P Aa, C, P A, C, P Nunis, Richard A. E Walker, E. Cardon A C A Watson, Raymond L. A, Ea, C A, C, Ea A, Ea A, C, Ea A, C, Ea A, C, Ea A, C, Ea A, Ea A, Ea Wilson, Gary L. N N N N N N N N N E Gold, Stanley P. Na Pa, Na Pa, Na C, Pa, Na C, Pa, Na C, Pa, Na C, Pa, Na Na Russell, Irwin E. Ca Ca, P Ca, P C E E Stern, Robert A. M. Bowers, Reveta F. N A, N A, C, N, P A, C, N, P A, C, N, P A, C, N, P A, C, P A, C, P Poitier, Sidney C C, P C, P C, P C, P C, P C, P C Bollenbach, Stephen F. Litvack, Sanford M. Mitchell, George J. N N A, N A, N A, N N N N, Pr Pr Ea, Pr Murphy, Thomas S. E Ca, E Ca, E A, Ca, E A, Ca E E E O’Donovan, Leo J. , S.J. A A A Aa Aa A, C A, C A, C Ovitz, Michael S. E Estrin,