It’s a Big World, After All : Disney’s Challenge Lies in Management

The reality for investors in Walt Disney Co. is that the departure of Michael Ovitz, president and second in command, will have little effect on the operations of the Burbank-based entertainment industry giant.

“It’s a blip in the long, successful history of Disney,” said one investment manager. And most other Wall Street professionals concurred that Ovitz’s departure would not seriously disrupt the company.

Disney stock fell $1.875 to $70.25 a share on the New York Stock Exchange on Thursday in trading that preceded the Ovitz announcement but perhaps anticipated that settlement of his contract, reportedly totaling $90 million, would crimp earnings. On the other hand, many stocks fell Thursday; the Dow Jones industrial average, of which Disney is a member, lost nearly 100 points.

Disney, which had $18.7 billion in revenue and $1.2 billion net income from filmed entertainment, theme parks and consumer products in the fiscal year ended Sept. 30, is doing well in all areas, an investment analyst said. And Ovitz, who joined Disney management only a year ago, had little involvement in those operations.

Still, investors may well ask troubling questions about the latest turn of events.

The departure of such a prominent executive after only a year indicates that Chairman Michael Eisner made a mistake in recruiting Ovitz to the job a year ago. Ovitz, a renowned and powerful talent agent, never adapted to the subtly demanding role of corporate executive.

So investors can focus on Eisner’s costly mistake: Ovitz’s reported contract settlement is about 7.5% of Disney’s fiscal 1996 net income.

Or investors can see strength in the fact that the mistake was corrected in such short order. Either way, the episode will revive questions as to why management seems less stable in Hollywood companies than in large firms in other industries.

Ovitz’s departure raises anew the question of succession at Disney. Eisner, 54, has been treated for heart trouble. And though in good health, he and the company have sorely missed the talents of Frank Wells, the president and chief operating officer who was killed in a helicopter crash in April 1994.

As the search for a new No. 2 begins, some Wall Streeters recalled Thursday that Stephen Bollenbach, a highly regarded executive who was Disney’s chief financial officer, left Disney in the last year to become chief executive of Hilton Hotels. Bollenbach’s departure was more of a blow than Ovitz’s, one analyst said.

Questions of stability have special relevance for Hollywood because the entertainment conglomerates that now constitute a major industry producing and distributing films, television shows, music and videos worldwide often still behave like the hit-or-miss store-front businesses they once were. Accounting seems fanciful even though ordinary movies cost $50 million to $100 million to produce, theme parks and TV networks represent investments in the billions and some companies are truly giants: Disney’s total market value is $37 billion.

There is a strength to the seeming chaos of thousands of independent companies making up the entertainment industry. Decentralization allows a high degree of ferment and creativity.

But with the growth of global markets for entertainment--and new prospects on the Internet--the business is demanding more formal organization and expertise.

Disney has been a leader in that respect. Last year it acquired Capital Cities/ABC to ensure distribution for its films and TV shows and to spread its reach globally with sports and other programming. The acquisition so far has been a financial success thanks to advertising revenues at the network’s owned and operated stations, analysts say. But the ABC network has fallen behind in the ratings under Disney management. Full development of the merged companies could take years.

The international business, which was Ovitz’s special province, is growing rapidly, to be sure. But Ovitz’s leaving, and the fact that for the last year he has been called upon to spur international operations almost as a lone wolf, point to a certain provincialism in Hollywood, analysts said.

For all the talk about global industry, Disney gets less than 20% of its revenues from overseas sales. Other consumer product companies, such as Coca-Cola and McDonald’s, get more than 50% of sales and profits abroad.

And Coke and McDonald’s are organized internationally, with local franchisees and employees in many countries. Hollywood, by contrast, is still a U.S. enterprise selling abroad, which could leave it vulnerable as global business evolves.

The bottom line for investors to consider is that Disney is an excellent company with enormous potential--”a blue chip, strong in all its operations,” says analyst Arthur Rockwell of Yeager Capital Markets in Los Angeles.

The challenge will be for Disney to fully realize that potential. On Thursday, amid the excitement about Ovitz, some analysts said “Disney can run itself.” But that has never been true.

Even the great legacy of Walt Disney--the classic films such as “Snow White” and “Bambi,” the beloved creations, Mickey, Donald, Goofy--was languishing in the early 1980s. That was when Roy Disney, Walt’s nephew, the head of Shamrock Partners and a Disney director, led an investment group that brought in Michael Eisner, who revived the franchise.

Eisner created a $2-billion-sales consumer products business out of Disney’s familiar characters. He got the firm rolling again and has brought it to its current preeminence in entertainment. But he did not do it alone, and cannot do it alone.

Investment professionals all agree that Ovitz’s departure won’t hurt Disney’s operations. But continued management vacancies could reduce its future potential, they say.

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More Coverage

* Michael Ovitz will step down as Disney president “by mutual agreement.” A1

* Many in the industry believe Ovitz will have trouble finding a comparable job. A1

* The split between Ovitz and Eisner dominated industry talk Thursday. D6