DisneyWar

by James B. Stewart

  But in a surfeit of caution, on Thursday, February 6, Comcast again reached out to Mitchell. After all, at this juncture there had been two intermediaries positioned between the Comcast executives and Mitchell himself. This kind of “telephone” approach was not only unorthodox, but inevitably risked a misunderstanding. This time, the intermediary called Mitchell from the Davis, Polk offices in New York. Hersch told the Comcast executives that he had conveyed the message “We’re coming. Are you sure?” Mitchell, through the intermediary, had answered “Yes, we want you to do this.”

  On Monday afternoon, February 9, Roberts, Burke, Larry Smith, Comcast’s CFO, and six of their advisers met at a conference room in the Westin Hotel in Philadelphia, across the street from Comcast’s headquarters, to make a final decision. That Wednesday, Comcast was scheduled to meet with Wall Street analysts, and it felt it would have to disclose its interest in Disney then. After numerous discussions of the timing, coming just weeks before the potentially contentious Disney board meeting the first week in March, the Comcast executives had concluded they had to act swiftly.

  Roberts was still worried about the accuracy of the messages from Mitchell. Another of the investment bankers—not Hersch or the usual intermediary—volunteered to call Mitchell. He stepped out of the room and used his cell phone to call Mitchell, who was in London that evening. Mitchell answered.

  “We’re ready to go tomorrow,” the Comcast banker told him, referring to the letter Comcast was going to send the Disney board. “Once you put this out, it will be huge news,” he said. “Gigantic.”

  “I understand,” Mitchell replied. “We see this as a positive thing. We’ll look at it carefully.”

  After the banker reported on the call, Burke said, “Okay, now’s the time. Do we go?”

  “I’ve got to call Michael,” Roberts said. He felt he owed Eisner a personal call, especially since Comcast hoped to characterize the offer as “friendly.” Because they worried about the quality of a cell phone connection, and Roberts wanted privacy, he stepped out of the room to use a nearby pay phone. Dennis Hersch followed him and waited anxiously outside.

  Roberts went into the phone booth and dialed Eisner at his office. Eisner happened to be at his desk. In less than five minutes, the call was over and Roberts emerged from the booth shaking his head.

  “You’re not going to believe this,” he said. “Michael said he wasn’t interested. He didn’t even hear a price. I couldn’t get the words out. He’s not interested at any price.”

  No one had expected this—not in the post-Enron era of heightened fiduciary duty to shareholders. At the very least, they thought Eisner would consider selling at some price. But he hadn’t given them a chance.

  As Roberts recounted the conversation, he had asked Eisner, “Are there any conceivable ways you could see putting our two companies together?”

  “No,” Eisner had said firmly. “I like the hand I’ve been dealt.”

  “Is there any conceivable way you’d sell?”

  “No,” Eisner had said curtly.

  That’s as far as Roberts had gotten in his script. The conversation was over in a matter of minutes.

  Comcast executives spent the next day huddling with their investment bankers, lawyers, and public relations consultants. On the one hand, Eisner’s reaction suggested they’d be in for a fight. There was no suggestion that Eisner wanted to retire, or was looking for a graceful exit, as Mitchell had first suggested. But by this point, the group wasn’t putting that much emphasis on Mitchell’s encouragement. They felt the deal made sense, and when both Disney and Comcast shareholders had a chance to consider this, Disney would have to negotiate.

  On Wednesday morning, they released a letter from Roberts to Eisner, which had just been delivered to Eisner, who was at Disney World preparing for presentations to Wall Street analysts. “Dear Michael,” the letter began.

  “I am writing following our conversation earlier this week in which I proposed that we enter into discussions to merge Disney and Comcast to create a premiere entertainment and communications company. It is unfortunate that you are not willing to do so. Given this, the only way to proceed is to make a public proposal directly to you and your board.”

  Roberts proposed a deal in which Disney shareholders would receive .78 shares of Comcast for each share of Disney, or a total of about $54 billion at the previous day’s closing share prices. The letter extolled Comcast’s 21 million cable customers, 5 million high-speed Internet customers, and the possibilities of video on demand and broadband video streaming of Disney content. “We hope that the Disney board will pursue the opportunity that this proposed combination presents to your shareholders,” Roberts concluded.

  The Comcast team waited anxiously for any signs of a Disney boardroom revolt. They didn’t have to wait long. That same morning, Barry Diller called Brian Roberts to report that he’d spoken to Eisner, who had consulted him about fending off the Comcast offer. On Diller’s recommendation, Disney had hired famed takeover defense lawyer Martin Lipton, of Wachtell, Lipton, Rosen & Katz in New York. Clients who hired Lipton rarely had any intention of negotiating a friendly merger, let alone embracing a hostile offer. Moreover, Lipton had represented AT&T in Comcast’s long, hostile, and ultimately successful pursuit of AT&T’s cable assets. They felt Lipton still resented Comcast from that battle.

  Later that day, after its board met by telephone, Disney issued a distinctly cool response to the Comcast offer: “The Walt Disney Company Board of Directors has received and will evaluate the unsolicited proposal from Comcast Corp. In the meantime, there is no action for Disney shareholders to take. Today and tomorrow, the company will present to institutional investors and analysts at a previously scheduled conference its broad array of unique and valuable businesses, as well as the strategies being deployed to fully realize the long-term value of those assets.”

  Roberts, Burke, and the rest of the team realized that something had gone terribly awry, despite all of their preliminary communications. Confronted with the reality of a bid from Comcast, Mitchell had evidently panicked and retreated into fortress Disney. Comcast’s line of communication through the intermediary went dead.

  The Comcast bid also encountered immediate, and more fundamental, obstacles. In Orlando, where Eisner, Iger, and other top Disney executives were meeting with Wall Street analysts, Disney officials were furious at the timing of the Comcast bid, in the belief that it had been deliberately timed to overshadow Disney’s presentations. But the presentations gave the company the opportunity to boost its stock price, which, in the face of an all-stock takeover bid, is by far the most effective defense. Disney accelerated the release of its quarterly results, which were buoyed by the effects of Nemo and Pirates. Disney shares rose 16 percent in two days, both from the improved results and as arbitragers jumped in, expecting a higher offer, either from Comcast or another bidder.

  Despite the efforts of Roberts and Burke to explain the rationale for the offer, both to Wall Street analysts and to major shareholders, investors reacted far more harshly than Comcast’s executives and advisers had expected. The stock of a company making a hostile offer almost always declines, and they had expected some negative reaction at first. But after years of capital investments and the $51 billion AT&T acquisition in 2002, Comcast shareholders had been looking forward to a period of increased cash flow and higher earnings, not another big new acquisition. They questioned a cable operator’s ability to run a major creative business, overlooking the fact that, in Steve Burke, Comcast had a seasoned executive and a Disney veteran ready to take the helm. In just two days of trading, Comcast shares dropped an alarming 12 percent.

  Since Comcast had made an all-stock offer for Disney, this meant that a .78 share of Comcast was now worth $23.53, while Disney shares had jumped to $28. The total value of the offer had fallen from $54 billion to $48 billion in just two days. The possibility that Comcast might increase its offer made its shareholders even more irate, leadin
g Comcast to issue a statement stressing that “at the right price, this is a great deal, and we are going to be disciplined about the price.” Comcast had left some room for a slight increase in the event Disney decided to negotiate a friendly deal. But those hopes were dashed on February 16, when the Disney board unanimously rejected the Comcast bid: “We are committed to creating shareholder value now and in the future and will carefully consider any legitimate proposal that would accomplish that objective,” the board said. Further, “the interests of Disney shareholders, which represent the fundamental priority of the board, would not be served by accepting any acquisition proposal that does not reflect fully Disney’s intrinsic value and earnings prospects.”

  Even so, the Comcast team was surprised when Disney, on George Mitchell’s behalf, issued a further public statement that any reports that Mitchell might have encouraged a bid from Comcast or suggested that any directors were unhappy with Eisner’s performance were “a complete fabrication.”

  When I asked Mitchell to elaborate, given the Comcast team’s detailed chronology of numerous communications, Mitchell replied by email: “I received a telephone call from a friend (who was later referred to as an intermediary) who asked if I would be willing to set up a meeting between Brian Roberts, his father, Michael Eisner, and me. After briefly considering the suggestion I called him back and declined. Later he called again and asked if I would be willing to meet with Brian Roberts. I again declined. I told him that if Brian had anything to say he should call Michael and say it directly to him. That is what happened. As it turned out, the Comcast bid, when it was made, was so low that it was rejected by Disney’s shareholders and its Board, and by the market.”

  Among those galvanized by the Comcast bid was Diane Disney Miller. Though she had vowed to stay out of the battle between Roy and Eisner, a corporate takeover threat was another matter. She was especially concerned after reading news reports that Comcast distributed pornography. (Like virtually all cable companies, Comcast carries adult-themed pay-per-view programming, and cable channels that sometimes broadcast material with explicit sexual content.) So, over the President’s Day weekend, she wrote a letter to the board and sent each a copy by Federal Express after getting their addresses from Roy’s office. After expressing her opposition to the Comcast bid, she continued, “I would hope that the independence of this company was almost as important to you as it is to us. I cannot believe that any of you would want to see this company suffer the same fate as befallen other recent victims of media ‘mega-mergers.’ Comcast, specifically, seems especially unsuited to Disney, a company which has always been dedicated to quality family entertainment.”

  So far, Disney’s public relations department could have drafted the letter. But then Diane veered in another direction:

  “We hope that the Board of directors will act to do what is best for the company. One of the greatest perceived weaknesses of the company has been Michael Eisner’s unwillingness to identify and nurture anyone who might be deemed a successor to him. We believe all Disney shareholders would, like us, be relieved to know that someone very uniquely qualified to head the company was being groomed to replace Mr. Eisner when his contract terminates in 2006. We believe that the Walt Disney Company is the most magnificent entertainment company that the world has ever known, and that it will never be equaled. It is a company full of talented, creative people who value being a part of the business that my father and uncle built. It is a company that deserves to stand alone, to remain independent, as it has always been.”

  On Tuesday, the day after the holiday, Eisner called. “Good letter, Diane,” he said. “If you could just change that last paragraph.”

  “But Michael,” she replied, “you’ve been there twenty years. Even university presidents don’t stay that long.”

  “Can’t you just say you support management?” he persisted.

  “I can’t say that,” Diane said. “I think it’s time for you to go. You’ve done some wonderful things, but it’s time.”

  “What are some of the issues that need to be worked on?” he asked.

  “I don’t want to get into it, Michael.”

  “Just give me one thing.”

  “Okay, the Ovitz thing.” The Ovitz firing followed by the huge payoff had always grated on Diane. She knew Ovitz had been Eisner’s best friend, and by hiring him, she felt Eisner had begun to treat Disney like his own private club.

  “Oh, Diane, I can explain that to you,” Eisner said. “He didn’t really make that much off of it.” He started to explain how Ovitz hadn’t sold his options when he could have, but Diane cut him off.

  “The point isn’t how much Michael Ovitz made off it, it’s what the Disney company paid out for it. Anyway,” she continued. “I just think it’s time for you to move out of the way for someone else.” She added that she wouldn’t have gone about it the way Roy did, but “it seems everyone perceives Roy as their hero.”

  “It’s the name!” Eisner exclaimed in evident exasperation. “It’s that Disney name! We’ve taken polls and Roy’s popularity is so high.”

  “Well, I don’t want you to think that I’m being swept along in the same stream as Roy and Stanley, because I think it’s destructive to the company.”

  Eisner seized on this opening. “Diane, please just change that last paragraph. I’ll write it for you.”

  “Michael!”

  “I’ll fax you a proposed rewrite of the letter.”

  Diane had no intention of changing her letter, and in any event, Eisner never sent a fax, and she heard nothing further. She was disappointed that, as time passed, none of the other directors responded to the letter. She thought she’d at least receive the courtesy of an acknowledgment or reply.

  Though overshadowed by the bid from Comcast, Disney executives faced a potential revolt by institutional shareholders. Roy and Gold—taking as their model Howard Dean’s grassroots, Internet-based campaign for the Democratic presidential nomination—had launched a website, SaveDisney.com, as the centerpiece of their effort to unseat Eisner. They became the first dissident shareholders to attempt to use the Internet to democratize the notoriously unresponsive system of corporate governance. “Shareholder democracy,” while lauded as the centerpiece of democratic capitalism, had in fact become an oxymoron, with the vast majority of corporations firmly in the grip of their chief executives and acquiescent boards.

  Roy and Gold’s initial effort had been criticized as cumbersome and ineffective, but in January they had introduced a redesigned site, with color graphics, streaming audio and video, and links to other sites. With many Disney animators at their disposal, the site was illustrated with original work. The first day, Roy and Gold posted a cartoon showing Eisner dressed as the evil queen from Snow White. “Who’s the greediest of them all?” Eisner asks as he gazes into a mirror.

  In a more serious vein, they used the site to unveil the focus of their effort: a “vote no” campaign to withhold shareholder support for Eisner and the three directors they deemed most under his influence: Mitchell, Judith Estrin, and John Bryson. As Disney executives had noted at the outset, Roy and Gold’s resignations had come too late to mount a genuine proxy contest, which would have offered shareholders an alternative slate of candidates for the board. But in recent years, shareholder advocates had used similar withholding campaigns to express their displeasure. The most prominent example had been at AOL Time Warner, where 22 percent of voters withheld their support for chairman Steve Case, who had orchestrated the devastating AOL Time Warner merger.

  It is difficult, if not impossible, for such efforts to actually evict directors. Brokerage firms, for example, routinely vote shares they hold for their clients in favor of incumbent management directors unless instructed otherwise by shareholders, most of whom never respond. Even most mutual funds and institutional shareholders lack the time and resources to evaluate the thousands of proposals that surface in proxy statements. Given that such efforts had never succeeded, ther
e was no incentive to buck the status quo other than to register a protest. Roy and Gold had no expectation or even hope of gaining a majority of “no” votes. Their goal was 10 to 20 percent; enough, they thought, to force the Disney board to heed shareholder displeasure and take at least some action.

  On January 27, Roy and Gold used the website to issue an open letter to shareholders:

  “Now is the time for all Disney shareholders to take the first step in bringing needed change…. Join us in voting NO on the re-election of Michael Eisner, George Mitchell, Judith Estrin, and John Bryson as directors…. By just saying NO you will send a message the Board of Directors cannot ignore…you will force the Board to recognize the widespread conviction that serious changes in both senior management and the Board are necessary.”

  Besides their usual criticisms of Eisner, the letter took aim at Mitchell, noting the more than $1 million in fees his firm had received from Disney; at Judith Estrin, chairman of the compensation committee, for approving “excessive” 2002 bonuses of $40 million for Eisner, Iger, and three other executives, a year when the stock declined 16 percent; and at Bryson, whose “wife was being paid millions of dollars as an executive of Disney’s 50 percent owned Lifetime Channel.”

  Of course, an audience of Disney shareholders was one thing. The far more critical audience were the proxy advisory services, especially the most influential of these, Institutional Shareholder Services (ISS) and Glass, Lewis & Company, as well as the large corporate and public pension plans, such as CalPERS, the California pension fund managers. On February 2, as the Comcast executives were sounding out Mitchell about a possible bid, Gold, Roy, and their colleagues from Shamrock made a critical appearance at ISS, stressing Disney’s poor financial performance and its unresponsive board. Mitchell from Disney explained the reforms the board had implemented and its intentions to institute more formal and detailed succession planning.