Can Disney's Kingdom Regain its Magic?

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Michael Eisner

No company has treated its CEO more regaly, over the years, than Walt Disney Co. Since landing the top job in 1984, Michael Eisner has collected more than $1 billion in total compensation. The magic of Disney was most evident in 1993, when Eisner's pay package of $203 million (almost all of it gains from stock options) was equal to 68 percent of the company's profits. When the Mouse was a growth stock, such pay was like the price of admission to Disneyworld — expensive, but at least you got some thrills out of the investment.

Now, for the first time in Eisner's reign, nearly every Disney division is sputtering. Ratings at its ABC network are horrible, and the theme park business is suffering from the economic malaise and post 9/11 downturn in travel. Takings at the new California Adventure theme park in Anaheim, one of two new locations, have been disappointing. The film studio is muddling through, and its relationship with Pixar Animation, which produced Toy Story, may be renegotiated on less profitable terms. Such ills have a symptom. Last week, Disney stock hit an eight-year low, closing at $14.65 — down 66 percent from its high in April 2000 — and the company's A3-rated long-term debt has been listed for a possible downgrade. At this price, analysts say, the company is a takeover candidate.

The long bloodletting has been hard to miss. Yet only now, as the issue of corporate excess has gotten hotter than Vin Diesel, is the Disney board asking hard questions, and is Eisner acknowledging the need for a strong board. He has said he'll reduce its size, now at 16, dumping some cronies to give outside directors more pull.

Directors with the most at stake are seething. Roy Disney, nephew of the company's founder, and his business partner Stanley Gold, control 17.5 million Disney shares. Two weeks ago, after the company reported weak quarterly results, word leaked that the pair had adopted an unusually combative tone. Some now speculate that Eisner won't be re-hired when his contract expires in 2006, or may go earlier. Mentioned as successors are Viacom president Mel Karmazin, Sony of America CEO Howard Stringer, and former Disney-ite Jeffrey Katzenberg.

Eisner, 60, says he isn't going anywhere and sees Disney as poised for a spectacular turnaround that an improving economy and movie hits such as "Signs" can deliver. He has noted that, as poorly as Disney is doing, the results and upheaval are even worse at competitors such as Vivendi Universal, Bertelsmann and AOL Time Warner (which publishes Time). Says Disney president Robert Iger: "We don't have any accounting issues to deal with. We are a healthy company and we have a global brand that is considered one of the most valuable in the world." Underscoring his point, Eisner and Disney chief financial officer Thomas Staggs signed off on the company's books on Friday, ahead of an Aug. 14 deadline imposed by the Securities and Exchange Commission on big companies.

Wall Street has doubts. The economy is clearly out of Disney's control, but not ABC, which lost 20 percent of its prime-time audience last season. "ABC is the one area we can turn to and say we have control over our performance, and it's our No. 1 priority," Iger says. The company will improve ratings by focusing more on family-oriented programming, he says. Though the results won't be fully visible until fall, Iger says advertisers have endorsed the strategy by spending $2.1 billion up front for primetime slots, second only to NBC.

"Clearly if you have a couple of hit shows your ratings can improve," says Jeffrey Logsdon, analyst at Gerard Klauer Mattison. "But they have talked about how ABC was a priority the last couple of years and it's still not happening." For now, an Eisner toppling seems unlikely. Even the Disney family could be brought back into the Eisner camp quickly if the stock turns up. Disney family members reportedly borrowed against the stock when it was much higher and may face a margin call if it declines further. Fixing that issue would go a long way toward fixing their faith in Eisner. Nearly two decades ago both Roy Disney and Gold championed Eisner to save the company. Now he needs to perform as well in rerun.

—Reported by Daren Fonda/New York and Jeffrey Ressner/Los Angeles