Disney Just Catching Its Breath, Eisner Says

It’s one month shy of his 15th anniversary running Walt Disney Co., and Michael Eisner has an analogy for where the company is now: at lunch.

“We ran a 440-yard race in the morning,” the Disney chief said, sitting in his Burbank office on Monday. “Everyone expects us to do a decathlon in the afternoon. We’re resting at lunchtime.”

And a rather long lunch it’s been. In a rising market, Disney’s stock is trading at about where it was two years ago. It’s off by nearly one-third over the last year. The company is likely to post its second consecutive year of falling earnings when its fiscal year ends Sept. 30, as its consumer products and video divisions lag. Restless investors are eager for a dramatic move, such as a major stock buyback.

That said, Disney and Eisner are hoping to convince investors the company just needs to catch its breath. Disney is planning some muted moves rather than a dramatic revamping, something executives hope will placate shareholders without ripping the company to shreds.

Bemoaning the “day-trading” mentality some investors have, Eisner said he wants to take the focus off short-term growth prospects and instead put it on long-term ones, such as the company’s Internet strategy and huge theme park investments in Florida.

“I’m much more interested in long-term shareholders than short-term shareholders. I don’t think you can create great wealth in a matter of days,” Eisner said.

Indeed, Eisner continues to believe the company’s problems are being exaggerated, noting that Disney, despite its problems, remains the most profitable of all entertainment companies.

“Everyone in the media is trying to figure out whether we have a terminal disease,” Eisner said.

For the last few months, Eisner and his chief financial officer, Thomas Staggs, have clamped down on spending as part of a larger plan to shave $500 million or so in costs. Departments have been ordered to cut travel expenses 20%, purchasing is being leveraged to get the best deals, the ailing Disney stores now have specific performance targets and departments are having to present a strong case when they want to make a major capital expenditure. Rather than build a Tarzan attraction at Disneyland, Staggs said, the company converted the ailing Swiss Family Robinson treehouse instead.

Then there is the issue of selling nonessential assets, such as its Anaheim Angels baseball and Mighty Ducks of Anaheim hockey franchises. It’s a delicate subject, and Eisner won’t confirm such plans. But reading between the lines, it’s clear the company is poised to divest.

Asked about it, Eisner starts by listing the reasons for getting into hockey and baseball in the first place.

It was part of a larger investment in Anaheim and Orange County itself, which he likens to a “core business” of the company. Disney at the time was trying to get a second theme park “gate” built next to Disneyland, hoping to make the city more of a destination resort than a one-day visit.

Getting the expansion Ducks provided a tenant to the city’s empty arena, and Disney also scored points with Anaheim by helping pay to remodel Edison International Field. Eisner also says he is convinced that had Disney not come along, co-owner Jackie Autry would have eventually moved the Angels elsewhere because the stadium wasn’t economically viable then.

In Eisner’s view, those strategies worked, which suggests he’s ready to move on. He compares Disney’s efforts to help Anaheim with the company’s’ efforts to revitalize New York’s 42nd Street with its theaters. The stadium has been remodeled, the company is now building Disney’s California Adventure theme park and the city is now redoing its convention center.

“Those things have all been accomplished,” Eisner said. “What we do after that is speculation.”

Eisner added that another plus to sports ownership has been to use the influence it brings to change the rules of the games to make for better sports television, which he said is much more important to the company than owning teams. He specifically cites the National Hockey League’s decision to change overtime games to four skaters for each side.

That said, Eisner added that ultimately he’s uncomfortable with the potential conflicts that Disney has in owning sports teams while owning ESPN and ABC, yet another hint that he’s a potential seller.

Eisner bristles at the suggestion that it will be hard for him to divest the sports operations because they are regarded as his pet projects.

“You don’t have to own the team to be a fan,” Eisner said, adding that Disney turned down potential ownership of the NBA’s Orlando Magic near Disney World as well as a proposal to own a baseball franchise there.

Yet the potential sale of its sports franchises is barely causing a ripple with investors. The $150 million Disney spent to make a single movie, “Tarzan,” is more than the company paid for either team.

On Monday, Disney’s shares rose 75 cents to close at $27.94 on the New York Stock Exchange.

Still, one major Disney investor said that such a move would send an important message to stockholders that there are no sacred cows at the company and that Eisner is willing to do what it takes to get the company on track.

Disney also is looking at possibly selling its Fairchild magazine unit, which includes such publications as Women’s Wear Daily, W, Los Angeles and Jane. Eisner scoffs at the suggestion that the company is paring itself. “We’re not holding a garage sale,” he said.

Staggs added that Disney won’t be selling its cruise ships, which cost $350 million a pop, and leasing them back as some investors wish it would do. The company tried leasing ships once, but found that it couldn’t control the quality as well as it can by owning them.

Eisner and Disney are at their biggest crossroads since the early 1990s when the Euro Disney theme park (since renamed Disneyland Paris) threatened to become a black hole for the company. In addition to the lagging stock and earnings, Eisner’s judgment on some matters has been called into question, particularly his decision to go toe-to-toe in court with former Disney studio chief Jeffrey Katzenberg before a settlement that ended up costing more than $250 million and plenty of embarrassment.

Whether Eisner will act decisively now is another matter. People who have worked for Eisner over the years have often complained that he puts off dealing with major company difficulties. Witness the dragging out of Michael Ovitz’s troubled tenure as president, failing to resolve the Katzenberg case quickly and the inability to name a strong No. 2 executive to help him run the company.

Eisner also has budding personnel problems, such as one with his current studio chief, Joe Roth. Roth’s unhappiness is an open secret in Hollywood, where most executives are betting he’ll leave rather than stay.

Eisner clearly thinks that’s a bum rap. He said the company was ahead of the curve in dealing with the cost of movies by trimming its film slate and combining operations to save costs. Likewise, the company combined its ABC and Disney TV production units. He does acknowledge mishandling the Katzenberg case, which he said should have been dealt with “maybe not faster, but smarter.”

As for rumors studio chief Roth may exit, Eisner said, “He and I haven’t discussed that he’s not going to stay.” Eisner said he’s confident Roth will stick around, lauding his work and calling him “the dean” of studio chiefs in the wake of the departure of Warner Bros. co-chiefs Bob Daly and Terry Semel.

Eisner claims that he’s exhilarated by the pressure of staying on top, which he said is more of a challenge now than when the company was in a hyper-growth mode. Despite talk that he’s facing tougher questioning from investors and directors, Eisner said he feels no pressure from the company’s directors to name a No. 2 or heir apparent.

“The best support I get is from our major investors and our board,” Eisner said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Michael Eisner on Disney:

“There’s no garage sale going on here.”

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On the possibility of selling the Anaheim Angels and Mighty Ducks:

‘Those things [the reasons Disney bought the sports teams] have all been accomplished. What we do after that is speculation.’

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On Disney’s future:

‘We ran a 440-yard race in the morning. Everyone expects us to do a decathlon in the afternoon. We’re resting at lunchtime.’

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On Disney’s financial situation:

‘Everyone in the media is trying to figure out whether we have a terminal disease.’