Is There a Dark Knight in Disney's Future?

First published February 24, 2004

By C. W. Oberleitner

JHM columnist C. W. Oberleitner takes a look at the media coverage surrounding Comcast's bid to take over the Walt Disney Company, then wonders if the future of the Mouse House might not lie down a road less examined.

Blood in the Water

In the days following Comcast CEO’s, Brian Roberts, February 11unsolicited bid to buy the Walt Disney Company, the phrase "blood in the water" was perhaps the single most-used metaphor to describe the timing for Roberts’ announcement. After all, WDC CEO, Michael Eisner, had been coming under ever-increasing criticism. Former WDC board members Roy E. Disney and Stanley P. Gold were in the midst of a campaign to have Disney shareholders withhold votes returning Eisner and three others to the WDC board of directors. Two weeks prior to Comcast’s announcement, Pixar Animation Studios ended all negotiations to renew their extremely successful relationship with the WDC. And, the week after that, Pixar CEO, Steve Jobs, had some very unflattering things to say about the WDC’s overall management and lack of creativity.

In the days following the Comcast announcement, this sharky metaphor is proving to be an apt one. One of nature’s largest predators, the great white shark has a habit of launching an initial attack on an intended target, then backing away from its prey. It circles around waiting to see if its victim attempts any type of defense or if other predators move in and attempt to devour the victim. And that’s just what Comcast has been doing since it first announced its intention to swallow the WDC, lock, stock, and debt.

While both companies have made a series of public pronouncements, Disney’s board has flatly rejected Comcast’s bid. Roberts has repeatedly said, mostly for the benefit of Wall Street analysts, that the company will not over pay for Disney and believes the initial offer is both fair and reasonable. It is Comcast that is circling Disney, watching and waiting to see how seriously the family entertainment titan has been wounded and what it may do next. It is Comcast that is always keeping an eye out for other predators eager to gobble up Disney’s wide array of assets.

Something for Everyone

Even if you are one of Comcast’s 21 million cable television subscribers, you probably didn’t pay much attention to the company’s comings and goings prior to its unsolicited bid for Disney. Comcast, unlike Disney, does not have a worldwide following of fans soaking up Internet bandwidth, sharing with one another their latest experiences with the cable giant. This probably goes a long way toward explaining why so many Disney loyalists were surprised to discover that Comcast, thanks to its successful acquisition of AT&T’s cable assets, is the larger of the two corporations.

Disney, on the other hand, is one of the world’s premiere brands. It is as much a cultural and social phenomenon as it is a marketing success. Even in some of the most remote parts of the world, you would be hard pressed to find people who didn’t know something of at least one its famous characters. So when Comcast’s unsolicited bid was announced, media outlets from Glendale to Glasgow began expending ink and electrons at a prodigious rate about both companies and their respective corporate cultures.

Reviewing the Comcast/Disney coverage and opinion pieces from newspapers and financial publications around the world, one thing becomes fairly clear, the final outcome of the struggle between the WDC and Comcast has already been predicted. The trick will be figuring out which publication and what analyst first offered the correct analysis of the situation. For, there does not appear to be an outcome or scenario that hasn’t already been offered by the world’s media.

For example, during the past two weeks analysts and investors from around the world have put the following theories forward:

Comcast will prevail either by

Patiently waiting, much as it did in its bid for AT&T’s cable business, for Disney’s stock price to drop to levels that make its offer more appealing to Disney shareholders
Sweetening its offer with cash from a partner like Microsoft, which owns about 7% of Comcast

Disney will prevail either by

Employing a "Pacman defense" and buying Comcast
Selling off a large stake in the company to a friendly investor or "white knight" like Hearst Corporation, which already owns 20% of ESPN as well as many ABC affiliate stations
Buying a Comcast competitor, like Echostar, owner of DISH Network a satellite television service provider
Replacing Eisner with a successor favored by Wall Street and keeping the cost-to-acquire Disney too high for Comcast’s tastes

One of the most fascinating aspects of this story has been the betting on Eisner’s ultimate survival. During the first seventy two hours following Comcast’s bid, you would have been hard pressed to find an analyst or financial pundit anywhere who wasn’t writing Michael Eisner’s career obituary. "Stick a fork in him," was an oft-repeated phrase used to describe his prospects. Now, with Disney’s stock holding well above the price offered by Comcast, many of those same analysts are hedging their bets and the odds on Eisner’s survival are running closer to 60/40.

Reporters and financial analysts seem to agree that this is going to be a protracted battle. And, for the present, it doesn’t appear that anyone else is going to come forward and try to grab Disney away from Comcast.

For the past decade, the WDC’s only real defense against an unsolicited takeover has been its sheer size. Indeed, since Comcast’s bid was announced, virtually every other giant in the entertainment industry has excluded itself from consideration or has been excluded by the financial press. In a story for The Los Angeles Times, Richard Verrier and Sallie Hofmeister reported:

The odds are long of another company coming to the rescue or storming the Magic Kingdom, analysts and investors say. Some face regulatory hurdles, don't have the money or have little appetite for the kind of mega-mergers that backfired on AOL Time Warner and Vivendi Universal.

The Road Less Traveled

There is something else the world’s financial media has in common. We all hear the same rumors and stories. We just don’t all publish everything we hear. For the most part, the U.S. media hasn’t demonstrated much of an appetite for speculation about the final outcome of this struggle beyond covering the waiting game currently being played by Comcast. The same cannot be said of the British.

Take, for example, the story about the WDC considering a move to sell the Hearst Corporation a "tranche of shares" in an effort to fend off Comcast. It first appeared February 19 in London’s venerable daily, The Times. A Disney spokesman later denied that the company had any such plans.

It was also The Times, which is owned by Rupert Murdoch’s News Corp., that reported WDC Presiding Director, former U.S. Senator George Mitchell, had stepped up plans to find a way to replace Eisner with a "Wall Street friendly" successor prior to the company’s shareholder’s meeting on March 3. Mitchell later denied every having made the remarks attributed to him by The Times.

While American media played it safe, The Times ran a story on February 13 about one of the most open secrets in U.S. business circles: <<Please place link here:

Pixar, whose chairman is Steve Jobs, the founder of Apple, which until last week was involved in a joint venture with Disney, is understood to be looking at forming a consortium of financiers to counter Comcast’s bid.

A spokesman for Mr. Jobs would not comment, but a Pixar source said: "Steve is looking very closely at this."

Putting it Together

Investors and analysts agree that rule number one of mergers and acquisitions is that the targeted company—in this case the WDC—almost always gets acquired by somebody, if not the initial suitor then a second or third or combination of predators. Knowing this, for the past two weeks, executives from every corner of the entertainment industry have had to be asking themselves, "Do we really want to see one of the biggest content providers in the business be taken over by a bunch of cable TV guys?" And, if they haven’t been asking themselves that question, it’s probably a safe bet that Steve Jobs has been asking it for them.

Last week, there was a run up in the price of Pixar’s stock. A rumor began circulating around Wall Street that Sony was about to purchase Pixar. Because traders always "buy on the rumor" and "sell on the news," Pixar’s stock jumped $2.30 a share. It didn’t take long before saner heads prevailed and analysts began asking why Jobs, who owns an estimated 60% of Pixar, would sell off a company he had just liberated from Disney’s shackles. The rumor was soon dismissed for having been a mistaken interpretation of news surrounding Pixar’s on going search for a new studio to form a relationship with.

What was truly interesting about this story was how widely circulated it was and how just as quickly, as if following a magician’s slight of hand, interest in it dropped. No one could see any reason Pixar and Sony might merge. No one, that is, but the folks who remembered how Sony Music has become one of Apple Computer’s iTunes Music Store’s most successful partners.

Sony, owner of Sony Music, Sony Pictures, Sony Television, and Sony DVD, is the only entertainment conglomerate without a broadcast, cable, or satellite outlet of its own. Sony’s market capitalization, $38.8 billion, relative to the value of Comcast’s stock swap offer for Disney of $50 billion, has kept Sony from being considered a serious Disney suitor. The possible merger of Sony and Pixar with Steve Jobs taking a leadership role in the new venture, however, could encourage those with capital to invest to join them in forming a consortium like the one The Times spoke of.

Even if Sony and Pixar join forces, they will still require huge amounts of capital to mount an effort to grab Disney away from Comcast. While no one is willing to go on record yet as to how such an alliance might pull this off, several highly speculative theories are emerging.

One such scenario has Jobs, ever the consummate salesman, striking a deal with Comcast CEO, Brian Roberts, to divvy up the Mouse Houses’ assets. Roberts and Comcast would get ESPN and most of the cable networks, save for The Disney Channel and Toon Disney. Sony and Jobs would get the studios, publishing outlets, resorts, cruise lines, and theme parks. Both companies would operate ABC as a joint venture.

However it all actually turns out, there was an interesting sideline to last week’s events. A letter to WDC shareholders, issued last Friday, February 20, by Roy E. Disney and Stanley P. Gold, came out publicly for the first time against the Comcast proposal:

Like us, Brian Roberts and his team at Comcast recognize the failure of Disney senior management to implement effective strategies that would realize the inherent value of Disney's assets. However, we believe Comcast's takeover proposal - in which Disney shareholders would receive less per share than the current stock price and far less than what we believe is full value for Disney's assets - is clearly not the answer.

Further down in the body of the letter, Disney and Gold go on to say that they would prefer to see the WDC remain independent under new management. The last line of the preceding paragraph, however, concluded with an intriguing statement:

Of course, we would seriously consider future offers that fully reflect the company's intrinsic value.

Whether it is just simply a statement of fiduciary responsibility, a timely coincidence, or a signal to Comcast and other potential suitors that the two men, like most analysts, believe the WDC to be worth significantly more than $50 billion, we will probably never know. It was intriguing, however, that this statement appeared so soon after the Sony Pixar rumor.

The Dark Knight Returns

While analysts and investors would probably consider a mega investor like the Hearst Corporation a White Knight, riding to the defense of the WDC, they, most surely, would have to view any attempt by Steve Jobs to assume control of the company as being even more hostile than Comcast’s unsolicited bid. And yet, among the WDC’s legions of fans—whose number dwarfs even those of Star Wars and Star Trek fans combined—there is probably no more preferred heir to the Disney legacy. Steve Jobs’ name rarely, if ever, appears on short lists of analysts’ picks for a "Wall Street friendly" replacement for Eisner; however, it is Jobs that those same talking heads often site as possessing the kind of vision, creativity, and willingness to take risks that are missing in Disney’s current management.

But how could a man who heads two companies, whose combined value is billions less than that of either Disney or Comcast, pull off such a coup?

The answer, while not highly probably, is somewhat possible. It is extremely unlikely that Jobs will be able to assemble the financial components required to assume control of Disney while, at the same time, fending off Comcast. For this reason alone, American financial media has largely ignored this aspect of the story. They do so, however, at their own peril.

Unlike their American cousins, British financial media analysts give as much credence to the personalities of the parties involved as they do to dry, statistical spreadsheet analysis of the numbers. By keeping a close eye on Steve Jobs, they have probably noticed something of great significance.

Aside from the previously mentioned Hearst Corporation, which already has a considerable co-investment in some Disney owned properties, Disney has very few so-called White Knight prospects. This is primarily because, thanks to his abrasive personality and reputation for highhandedness, Michael Eisner has few friends among the world’s super wealthy. On the other hand, a quick look at the list of Forbes richest Americans finds more than a few names of people known to be friends (or at least on very friendly speaking terms) with Steve Jobs. Among these are numbers two and nine on Forbes’ list, Warren Buffet and Larry Ellison.

Steve Jobs has a long history of cultivating relationships with powerful people. In 1986, shortly after being forced out of Apple, Jobs launched a new computer company, NeXT, with the help of billionaire Ross Perot. Larry Ellison, founder of Oracle the world’s second largest software maker after Microsoft, has been a long time friend of Jobs and once served on Apple’s board of directors. Additionally, Jobs success as lead salesman for Apple’s very successful iTunes Music Store has made Jobs a well-known and well-respected figure in the executive suites of the country’s biggest music, media, and entertainment companies.

The key phrase in The Times February 13, story was, "forming a consortium of financiers…." Clearly, Steve Jobs has access to the resources necessary to form such a consortium.

C’ya real soon!