Quotes of the Day
"Is this a good time to talk?" Brian Roberts asks. The CEO of Comcast, the largest cable company in the U.S., is on the phone for a quick interview before jetting off to meet with investors and pitch his latest gambit: a $66 billion hostile takeover of the Walt Disney Co.
He had just asked that very question, after a fashion, of Disney CEO Michael Eisner. "I asked Michael, did he see a scenario where we can do this together?" Roberts recalls of their phone conversation. He won't characterize the rest of their chat, although you don't have to be an Imagineer to know Eisner's answer. So Roberts, polite as ever, precipitated a takeover brawl that has Wall Street investment bankers and Hollywood power players salivating: the Cable Guy from Philadelphia vs. the Monarch of the Magic Kingdom. For Roberts, who started his career selling subscriptions door to door for his father's fledgling cable company, it is the boldest move of a 23-year run at Comcast. And it threatens the reign of Eisner, one of the information age's legendary moguls. "He will not go down without a fight," says Joe Roth, former chairman of Walt Disney Studios.
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Eisner, 61, took over a doddering Disney in 1984 and made it spout money. But since 1996, Disney has been sputtering. Eisner's outsize compensation, his somnolent board of directors and poor performances at ABC and Disney's theme parks and animation business have made him a target. Eisner's micromanaging style, imperious mien and inability to groom a successor — all perfectly acceptable when you're coining money — are now liabilities. Chief dissident Roy Disney, the founder's nephew, has called for his head, and Institutional Shareholders Services, an influential investor-advisory group, has recommended that its clients withhold their vote for Eisner at the company's annual shareholders' meeting next month.
Roberts, 44, keeps his ego in check and his checkbook handy. The trim, bespectacled executive is renowned as a shrewd bargain hunter and corporate strategist. "He's one of the most likable people, but whoever sits on the other side of the bargaining table should have a healthy dose of fear," says Terry McGuirk, vice chairman of Turner Broadcasting and a longtime friend. Roberts, an all-American squash player at the University of Pennsylvania, has a "black belt in strategy," says McGuirk.
That was certainly evident 15 months ago when Roberts bought AT&T's cable assets for $51 billion and promptly turned them from an albatross into a moneymaker. He recaptured or replaced subscribers lost under AT&T management in 2002, boosted operating cash flow and upgraded the systems to make high-definition television available to more than 80% of subscribers ahead of schedule. With $18.3 billion in revenues in 2003, Comcast bills 21.5 million cable subscribers each month (out of 40 million potential customers in the areas it services) and, after unloading its stake in the QVC home-shopping network for $7.9 billion, has a balance sheet healthy enough to go at Disney.
Essentially, Comcast wants the Mouse House so it can control costs and ensure the supply of a nearly bottomless well of Disney movies, TV shows, sports and other forms of entertainment that Roberts now pumps through his TV and Internet plumbing lines. Yes, the deal would link a content powerhouse (Disney) with a cable and Internet king (Comcast)--a classic convergence play — which makes investors skeptical, since they have been burned by other mergers premised on such a strategy. Yet when Roberts talks about a Disney coup, he doesn't use buzz words like synergies and digital transformation. The near term future of his industry isn't that mysterious.
An epic business battle is about to unfold, and Roberts doesn't want to be outgunned. Cable operators, Baby Bells, satellite companies and even utilities are assembling the resources to deliver video programming, phone service and broadband Internet access through a single pipeline to your home, one they all would dearly love to control. The goal: to sell you as many add-on services as they can, such as premium television, video on demand and pay-per-view sports.
Though the spotlight is on the duel between Roberts and Eisner, it was the maneuverings of another mogul, Rupert Murdoch, that helped provoke the fight. When his News Corp. empire bought control of the DirecTV satellite service last year, it gave Murdoch a pipeline for his programming and a hefty bargaining chip in negotiations with cable companies like Comcast over fees for his popular Fox channels. "If you want to build a new channel, you need to pass 40 million homes to break even," says Craig Moffett, a telecom-equity analyst at Bernstein Research in New York City. "Until Murdoch got DirecTV, that meant all roads led through Philadelphia." Murdoch's moves stepped up the pressure on Roberts to counterattack. Adding Disney would make Comcast the world's largest media conglomerate, with annual revenues of $45 billion and a market cap of $122 billion, about $40 billion to $50 billion more than its closest rivals, Viacom and Time Warner (TIME's parent company).
Comcast's bid put a dark cloud over what Disney had planned as a turnaround party. Eisner had invited dozens of stock-market analysts and journalists to Walt Disney World in Orlando, Fla., to announce with fanfare that the company's quarterly profits had increased sharply and to project that earnings in 2004 would rise as much as 30%. But Eisner wound up talking more about why Disney should be left alone. "We love being a content company," he told the analysts. "We've been a content company for many years. We do think content is, if not king, then king and queen." He brushed off the royal pain of Comcast's offer.
Meanwhile, Roberts was in New York City telling shareholders that Comcast could run Disney better than Disney can — or more pointedly, better than Eisner can. In a press conference, Roberts and Comcast Cable president Stephen Burke promised they would increase Disney's cash flow by up to $1.2 billion in three years. "You have to be reasonably skeptical about that," says Moffett. Yet Disney's 2003 net income is down $583 million from its 1998 peak of $1.85 billion, and Disney shares hovered at about $24, down from a high of $43.63 in April 2000, before a run-up last week on takeover speculation. The pair underlined Disney's shortcomings. Among them: the ABC television network, mired in fourth place in the ratings war, made just $37 million in 2003, after clearing $1 billion in operating income in 2000; and Eisner failed to deliver the cash forecast from his $5.2 billion purchase of the Fox Family Channel, which was renamed the ABC Family Channel. Over at Disney's animation division, Comcast says, it would reignite a legendary workshop that Eisner downsized. "When the division was firing on all cylinders," said Burke, "it cranked out hits like The Lion King and Beauty and the Beast, which flowed through the rest of the company and re-energized everything. Disney all but abdicated that business."
Comcast's gibes sound a lot like the criticisms flowing from shareholders who have grown irate over Eisner's stewardship. He has been contending with a shareholder uprising led by ex-board members Roy Disney and his partner, Stanley Gold. The duo quit the company last fall, fed up with Eisner's alleged mismanagement, and are trying to persuade shareholders not to re-elect him at the company's annual meeting on March 3. Eisner suffered a body blow when Steve Jobs, Pixar Animation Studio's boss, decided not to renew a co-production and distribution agreement after 10 months of sometimes acrimonious negotiations. Pixar's computer-animated films, from Toy Story to Finding Nemo, have produced billions in revenue for Disney.
Perhaps the most stinging charge is that Eisner has repelled corporate talent, particularly anyone with CEO potential. Disney has suffered an exodus of executives during his tenure. Its cast members no longer include execs like Paul Pressler, now at Gap; Geraldine Laybourne, who quit to co-found Oxygen Media; and Jeffrey Katzenberg, the man behind The Lion King, who co-founded DreamWorks. Comcast's No. 2 executive, Burke, is a fast-track escapee. He spent 12 years at Disney and proved himself a skilled executive by recharging Disney's consumer-products division (it faltered after he left) and reviving Euro Disney (another recent relapse), then working in Disney's TV-networks business. Katzenberg is effusive: "When we started DreamWorks, I tried desperately to get him to come on board. That's how much I admire him. He's an amazing talent."
Disney's best defense may be "Just say no." Wall Street already thinks Roberts made a lowball offer. His initial bid valued the company at about $54 billion in stock, roughly a 10% premium over the price at the time. But its shares immediately shot up nearly 15%, past the value Roberts attached, suggesting that the Street thinks Disney could fetch a price in the 30s, up from last week's closing price of $26.92. Asserts Roberts: "Everybody says, 'My house is worth more.' The question is, Are there other people who are willing to pay more?" Murdoch has already said he's not playing, and Time Warner has indicated that it's not interested. Roberts isn't likely to get sucked into a bidding war. He walked from the sale of Vivendi Universal's assets last year when the price got too rich for him. Disney could conceivably buy a cable company too, making itself too big to be swallowed. But that scenario seems unlikely.
One of the most tantalizing prospects of a Comcast-Disney merger is returning Pixar to the family, which could change the deal calculus. "I've always thought that Disney was the only logical partner for Pixar," says Larry Haverty, managing director of State Street Research in Boston, which holds 5 million Disney shares. "If Roberts knows something about what Jobs is likely to do, he can be very aggressive in his bidding." A source close to Comcast says, "Brian has reached out to Steve. They've made contact in the last week or two."
Burke describes Disney as a company that responds to strategic threats by creating feuds instead of partnerships. "They are at war with the cable industry, with Harvey Weinstein [co-chairman of Miramax], with Pixar. Maybe there are good reasons for that, but we don't think there are. We want to change the atmosphere and culture."
That's about as direct an attack against Eisner as can be made. And Burke knows Eisner is running low on allies. To another former Disney executive, it all reeks of a cabal organized to overthrow King Michael. Weinstein has made no secret of his discord with Eisner. Neither has Jobs. Nor has Roy Disney. And they have all known Roberts for years. "It's sad," says the ex-Disney man. "But Michael really brought this on himself, and he only has himself to blame." It's a very dramatic, very Hollywood way of thinking, of course. To Roberts and Comcast, it's just business.
- Daren Fonda