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Will The Legend live on?
The Walt Disney Company has been one of The Most Iconic Corporate Turnarounds in Business History. Robert Iger has been Strategically Leading The Company since 2005, but The Challenge lies in reducing dependence on a Specific Business Segment. Is Disney up to it?
Issue Date - 12/05/2011
September 24, 1984: Despite his undisputed success as President of Paramount Pictures, Michael Eisner woke up feeling nervous. Monday morning blues were rare for a man of Eisner’s capacity. But, it was his first day as the Chairman and CEO of the Walt Disney Company. Two days back, Eisner waited at his home along with his wife Jane and friend Michael Ovitz while the Disney Board met to take a final decision on his appointment. A few minutes later, he got a call from Stanley Gold, President and CEO of Shamrock Holdings, Roy E. Disney’s (Walt Disney’s nephew) private investment company, stating that Eisner has got the job. Additionally, Frank Wells, former VP at Warner Bros. has been appointed as President and COO. In the evening, both Eisner and Wells joined a party hosted by Roy in honour of the new management. Towards the end, Eisner turned to Roy exclaiming, “We know you’re responsible for us being here. I’ll never forget it. If I ever lose your confidence, let me know, and I’ll resign”.

November 30, 2003: Roy is informed that he would not be renominated to the Disney board! In the afternoon, he decides to step down himself; sending the resignation to Eisner & dispatching copies to leading media houses. The following day, Gold also resigns and the duo decides to wage a war from outside to save the company. After much deliberations, Eisner finally resigns on October 01, 2005; handing over the reins to Robert Iger, President, Walt Disney Company.

Of course, there was a chain of cataclysmic events in between. In 1984, the company was struggling with insurmountable pressures. After achieving a high of $123 in 1973, Disney’s stock fell back to meager $50 levels. When Eisner and Wells joined, they were burdened with the task of turning around a legendary corporation, which had almost lost everything barring the legend. But, in less than four years, they did so, and Eisner became the darling of Hollywood and Wall Street. Profits increased by five times to $444.7 million and revenues doubled to roughly $10 billion. However, in 1994, Frank Wells died in a tragic helicopter crash. Ever since, Eisner lost his midas touch. In 2002, the operating income fell drastically by 29.5% yoy to reach $28.22 billion. Issues like his theme park expansion plans, choice of comrades and handling of ABC Networks brought Eisner under severe criticism. When Roy expressed his displeasure, Eisner ensured that he was taken off the board. And by now, you know the rest of the story.

Nevertheless, Walt Disney Company is a much steadier ship today. In 2003, revenue stood at $26.48 billion and it grew to $38.06 billion in 2010, implying a CAGR of 5.31%. It isn’t the 20% growth rate that Eisner targeted yet, but the company is showing a reasonably healthy financial position despite the global financial meltdown. The man behind this success is Robert Iger, President and CEO. When he took over the office in 2005, Disney was a bottomless spiral of bureaucratic traps. Employees were afraid of decision making, which was largely centralised. His first priority was to undo the damage, which Disney had endured mostly on part of Eisner’s egoistic pursuits. He started off by patching up with Steve Jobs’ Pixar Animation, a relationship which Eisner had destroyed. According to Michael Corty, CFA Stock Analyst, Morningstar “Iger knew the importance of animation to its studio entertainment business, so he quickly patched up with Steve Jobs”. On January 24, 2006, Disney acquired Pixar for $7.4 billion in stocks. Although the move made Jobs the largest shareholder in Disney, it has proved to be one of the best acquisition that has bolstered Disney’s animation division. In 2010, the studio released Toy Story 3. Produced at a budget of $200 million, the movie grossed $1.06 billion; becoming the highest grossing movie of 2010 worldwide and the 5th highest grossing film of all time. The acquisition of Marvel entertainment couldn’t have come at a better time. Despite being in the movie business for ages, Disney always felt restricted with respect to its target audience. With more than 5000 characters under its label, Marvel has given Disney access to an array of inventory, which presents enormous franchising opportunities (properties can be exploited across segments). Disney is making considerable investments in the Parks and Resorts business. It has already started construction of the Shanghai Disney Resort. Conceptualised on a budget of $4.4 billion, the media giant holds a 43% stake in the venture. Although this is a late cycle business, the company will realise formidable earnings riding on the back of economic recovery and the 260 million viewers of its TV shows in the mainland.

One of the areas where Disney needs to work extensively is the interactive media segment. The business has been incurring operating losses for the past three years. Till last year, the Interactive Media Group had an employee base of 700. After the announcement of the results for 2010 wherein the division posted losses of $234 million, around 30% of the workforce was laid off.

Disney is on the right track so far and Iger seems to be playing all his cards right. The risk however lies in the fact that revenues are centralised. A segmental analysis of Disney’s business reveals that the Media Networks business generates 45% of all revenues. The remainder, which includes Parks & Resorts, Studio Entertainment and Consumer Products contribute 28.27%, 17% and 6.83% respectively. The media network business forms the backbone, and ESPN contributes 75% of cable network sales. But the growth of live streaming providers like Netflix can threaten that in the future.

Disney needs to extensively work on reducing its dependence on one business. Currently, the business is doing well, but then, the problem with good times is that they may ignore potential problems on the way. Moreover, with the kind of opportunities that he now has, Iger needs to push for higher growth in revenues and a return to the legendary days of lore.

Amir Moin           

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