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ANALYSIS: Battle Leaves Disney Vulnerable

Mar 8, 2004  •  Post A Comment

In the jungle that is the media and entertainment industry, The Walt Disney Co. has become the equivalent of a wounded animal stalked by predators.

Thanks to a combination of shareholder outrage due to perceived intransigence on the part of the Disney board and CEO Michael Eisner’s refusal to heed calls to step down, many observers said the fabled media giant is more vulnerable than ever, at the worst possible time.

Aside from the sense among some analysts that Disney’s internal imbroglio has helped create fissures that cable giant Comcast is certain to exploit in its quest to merge with the company, the fight between shareholders and Disney management comes at a delicate time in the company’s recovery and could provide a distraction the company cannot afford.

“It is my hope as a shareholder that operates a fund that the company’s improvement is not derailed by what happened,” said F. Jack Liebau, president of Liebau Asset Management in Pasadena, Calif. “A lot is going to depend on the perception of Michael Eisner. If it appears that he has learned something and he reaches out [to shareholders], then that will serve him well. If he dismisses the vote as a one-time occurrence, that will not serve him well.”

Judging from the reaction of many shareholders following last Wednesday’s annual meeting in Philadelphia, the battle is shaping up to be anything but a one-time event. One issue is that Mr. Eisner was replaced by George Mitchell, the former U.S. senator from Maine, who also drew a 24 percent no-confidence vote at Wednesday’s meeting. He is seen by many shareholders as beholden to Mr. Eisner and not up to the job.

“Mr. Mitchell has a checkered history as a corporate director and lacks the business acumen, independence and credibility to serve as chairman of The Walt Disney Co.,” said Stanley Gold, a former board member who, with former director Roy Disney, started the campaign to oust Mr. Eisner from the company. “His selection as chairman is a terrible choice by this board. It is a grave disservice to their shareholders.”

Indeed, shareholders are already making it known they aren’t happy. Executives at some of the large pension funds have called on Mr. Eisner to step down by the end of the year, and Mr. Gold said that he and his team are considering litigation.

There also is a proposal awaiting approval by the Securities and Exchange Commission that would allow dissident shareholders to nominate a minority slate to serve on a company’s board if at least 35 percent of the shareholder vote is withheld for a company-nominated candidate. If the SEC approves the proposal, it could be retroactive to Jan. 1, 2004, allowing Disney’s dissident shareholders to offer their own minority slate next year.

Mr. Eisner has said he plans to stay on as CEO, telling The Wall Street Journal that the board’s decision to strip him of only the chairman title is “the right for shareholders,” particularly at a time when the company is seeking stability in the face of a hostile takeover bid.

“It is clear to us that the board resoundingly supports Mr. Eisner,” said Merrill Lynch analyst Jessica Reif Cohen. “Should the board do nothing following this vote, we believe that shareholders will place Mr. Eisner as well as the board on a very short leash.”

“I think given the vote, any change that is seen as cosmetic won’t satisfy the shareholders’ concerns,” said Charles Elson, director of the University of Delaware’s Center for Corporate Governance. “You need near-unanimity of shareholders or the company is fighting with itself.”

Fighting with itself makes it difficult for Disney to fend off a $54 billion hostile merger bid by Comcast Corp.

Before the shareholders meeting, analysts said Disney was in a much better position to fend off Comcast’s offer. After Wednesday’s vote, Comcast was seen as having regained the advantage. That view gathered even more strength once Microsoft Chairman Bill Gates quashed speculation that his company-which has $50 billion in cash and a 7.4 percent stake in Comcast-was considering a bid for Disney.

“We believe the negotiating leverage appears to have shifted back into Comcast’s favor, given the apparent vulnerability of Disney’s management team and the shakeup of the Disney board,” said Aryeh Bourkoff, an analyst at UBS Securities.

Despite Comcast’s having been twice rebuffed by Disney’s board since the shareholder vote, both Mr. Bourkoff and Ms. Cohen see Comcast’s potential as an acquirer of Disney increasing, provided Disney’s independent board members agree to sit down with Comcast executives to discuss, among other things, boosting the bid price.

But it wouldn’t be an easy sell to Comcast shareholders, who balked at the proposed merger and who have helped drive Comcast shares down 10 percent since the Feb. 11 announcement of the proposed merger.

Douglas Shapiro, an analyst at Banc of America Securities, said Comcast still has a long way to go in proving it can wring out the synergies it discussed when it first proposed merging with Disney. And now that the programming fee flap between Cox Communications and Disney-controlled ESPN is over, Mr. Shapiro said it’s tougher for Comcast to justify the need to own ESPN.

Indeed, given the favorable terms ESPN gave to Cox, Mr. Shapiro said, “It is less obvious why Comcast needs to own it to control its costs.”