Iger wins over Wall Street and Main Street
In first year, CEO turns around the Dow component and boosts shares
By Russ Britt
Last Update: 12:01 AM ET Dec 6, 2006 LOS ANGELES (MarketWatch) -- It may seem like an obvious, logical move now, but even those who work for Walt Disney Co. Chief Executive Robert Iger initially thought buying Pixar Animation Studios was a big gamble.
When Iger pulled the trigger earlier this year on the $7.4 billion transaction, many in the entertainment industry questioned the wisdom of shelling out that much money for a company that puts out a single product once a year. Sure, Pixar had been wildly successful, scoring more than $3.6 billion in worldwide receipts, but it faces rising competition from other Hollywood studios.
Yet the move accomplished several tasks for Iger and Disney. It mended fences with Pixar chief Steve Jobs, who had grown weary of the mercurial Michael Eisner, Iger's predecessor. It also put in Disney's camp the animation specialist that had trumped its once-dominant position in the market. And it represented a symbolic but critical return to Disney's roots, seeming to quickly heal the deep divisions that ailed the entertainment giant.
"He basically put his money where his mouth was and put the program together and did it," said Dick Cook, chairman of Walt Disney Studios, the company's feature-film operation. "You know, I think [that was] an awfully, awfully bold move. But clearly [it was] strategically so smart because it is at the core of our business."
The Pixar buyout was just one of many moves made this past year that have won plaudits for Iger from all quarters. He's reached out to many estranged partners, freed Disney's corporate culture from the micromanagement days under Eisner and got the company looking toward the future. As a result, the Dow component is firing on all cylinders, exemplified by record earnings and a more than 40% rise in the company's stock since the beginning of the year.
It's also why Iger is the 2006 winner of MarketWatch's CEO of the Year Award.
Iger's extending of the olive branch to Pixar said more about the new tone at the company and how he planned to depart from the path it had been on for more than two decades.
Then, his new style worked to help patch up relations with Roy Disney, nephew of the company's founder, and Stanley Gold. Disney and Gold led a high-profile shareholder revolt that eventually ousted Eisner -- and called for Iger's head in the process.
Once Iger made up with Pixar and the dissident shareholders, and made it clear that it was a new day for Disney corporate culture, the rest just seemed to fall into place.
The problems stemming from the Sept. 11 terrorist attacks that took a chunk out of Disney's theme-park business are now distant in the rear-view mirror. Its ABC Television Network has leapfrogged from the bottom of the ratings heap to the top on the strength of such shows as "Grey's Anatomy," "Desperate Housewives" and "Lost." The network recently won the November sweeps among broadcast networks.
Heretofore lagging businesses such as Disney's consumer-products division now show signs of thriving under a newly invigorated company. And Iger is pushing Disney into the latest phase of the digital age by getting television programming onto iPod devices and plans to take the company much deeper into that realm. He's venturing more aggressively in that direction than most of the major media conglomerates.
Disney's transformation under Iger seems to have come at lightning speed, considering it was less than three years ago that a shareholder revolt brought the company to its knees.
Roy Disney and boardroom ally Stanley Gold had called for the removal of Eisner, as well as several other board members, and they got 45% of shareholders to agree. At the company's March 2004 annual meeting in Philadelphia, those shareholders backed Eisner's departure, prompting him to step down from his post as chairman. He gave up the chief executive post in September 2005 after 21 years at the company's helm.
To say the choice of Iger, Eisner's handpicked successor, was met with skepticism would be an understatement. It was more blatant outrage, particularly on the parts of Gold and Disney, who accused the company of giving short shrift to other potential candidates such as eBay Inc. Chief Executive Meg Whitman and Pixar's Jobs, who also heads Apple Computer
Disney and Gold called for the company to embark on a more extensive search. After Iger was in place, though, they relented. Iger reached out to them, giving Roy Disney the title of director emeritus, and pledged an open relationship with the former vice chairman.
And that relationship has been maintained, sources close to Gold and Disney say.
Before he became chief executive, Iger was Eisner's second-in-command, and, while his name was widely known, he didn't have the visibility, or the aggressive public profile, of his boss. With movie-star looks and a celebrity marriage to TV journalist Willow Bay, the 55-year-old Iger easily could have become a high-profile CEO in his own right.
But, by all accounts, Iger has taken a lower-key approach, so much so that he would not comment for this story.
Whether part of his personality or a calculated tactic, keeping his head down was the only way for Iger to ensure he would ascend to the top job, said James Stewart, author of the bestselling book, "DisneyWar," which chronicles Eisner's rise to power and ultimate downfall.
After a litany of executives -- DreamWorks Animation's Jeffrey Katzenberg, Hilton Hotels Corp.'s Stephen Bollenbach and former superagent Michael Ovitz, to name a few -- left after having become perceived as threats to Eisner, it was clear Iger needed to be more understated to survive.
"I think the Ovitz situation indicated that a true rival to Eisner was never going to stay and succeed him," Stewart said. "Now I do know enough, from hanging around Eisner and talking with Iger, that [Iger] did bite his tongue. I think he expressed his business views, but he did stay in the background, and it was sometimes hard for him."
Eisner would not comment for this story but did issue a written statement.
"Bob Iger and the entire management team have done a great job in the last year. They are making the right moves at the right times, which will keep the company competitive in the years to come," Eisner's statement said.
It was clear from the outset of Iger's tenure that he wanted to take Disney in a new direction. Known for running the company with an iron boot, Eisner had a reputation for alienating employees, vendors and just about anyone who came into contact with Disney, Stewart said. Iger's roots are in the more genteel Capital Cities/ABC culture, where he toiled for 20 years until Disney acquired the broadcasting operation in 1996.
"It wasn't about the sun king at the center of the empire," Stewart said of Iger's time at Capital Cities. "It was about the decentralized decision making going down into the operating ranks. Iger always said that's what he wanted to do -- to emulate that old Cap Cities/ABC model. I wonder whether Eisner himself really thought through the implications of that, because it's so different from the way Eisner managed."
While it's been widely reported that Eisner micromanaged to the point of getting involved in office-décor decisions, Anne Sweeney, co-chairwoman of Disney's media networks, indicated that Iger is definitely a hands-off manager.
"I think the most important thing he did was he gave me the job and then he let me do it," Sweeney said. "I've always had a lot of autonomy."
Even though Iger cut 600 jobs from Disney's studio operations earlier this year and another group of about 160 animators last week, morale still seems to be high, according to numerous sources. Iger encourages debate and even dissent in the ranks, one insider said.
Drawing in Pixar
One of Iger's first official acts was to make available the ABC hits "Desperate Housewives" and "Lost" for downloading at Apple's iTunes store. Right after the first of this year, the content available there was expanded to include material from ESPN, ABC Sports, ABC News and a multitude of other Disney properties.
That alliance with Jobs' Apple, in retrospect, might have telegraphed to the business world that some sort of Disney-Pixar pact was in the works.
The two had collaborated on a string of computer-animated hits over 11 years, but Pixar was bent on parting ways with the entertainment giant while it was under Eisner's control. In fact, that was among the factors driving Roy Disney and Stanley Gold's shareholder revolt.
Relations thawed once Iger took charge, and on Jan. 24 Disney announced its plan to buy Pixar.
Many on Wall Street remain concerned that Disney paid too much for the company, particularly since Pixar's most recent effort, "Cars," didn't perform as well as past releases, though it is the year's second-biggest-grossing film.
Growing competition from Katzenberg's DreamWorks, News Corp.'s
Fox, the Time Warner studio Warner Bros. and others could emerge as a major obstacle to Disney-Pixar success.
But the deal made more sense as time has passed, according to analysts.
"I think it's a steal," Sanders Morris Harris's David Miller said. He added that other studios didn't do nearly as well with their animated films this year, and he said he believes Pixar films can rise above the fray in coming years.
"The [rival] films just weren't that good, and they don't have a brand in that space," Miller said.
Iger quickly followed the Pixar deal with another move that was applauded in financial circles by merging nearly two dozen ABC Radio stations with Citadel Communications. While Disney owns a controlling interest in the new company, Citadel personnel are running it.
Far from feeling threatened by it, Iger appears to have embraced the online world more than most media executives have. It's been reported that more than half his time is spent exploring new ventures involving the online distribution of content.
In addition to making content available to iPod devotees, Disney under Iger has expanded its downloadable movie selection and expanded its ABC.com site. The company also is examining wireless phone ventures and recently created a wireless telephone service tailored to children. Robert Iger
Company:Walt Disney Co.Age:55CEO since:2005Formerly president and chief operating officer at Disney. Began his career at ABC in 1974. Member of the board of directors of the Lincoln Center for the Performing Arts and a trustee of the American Film Institute Board. Serves on the Executive Advisory Board of the Elizabeth Glaser Pediatric AIDS Foundation.
Iger's belief in the future of online entertainment is so strong that he has called for tightening the window on theatrical releases to deal with the growing threat of illegal film downloads. He has gone so far as to concede it might be necessary to release DVDs simultaneously with theatrical films. That has ruffled the feathers of more than a few theater owners.
Model for reform
In June, Disney named a new nonexecutive chairman to head its board. John Pepper, Procter & Gamble's chairman and chief executive, was appointed to succeed George Mitchell upon the former U.S. senator's retirement.
Under fire for years over a perceived inattention to corporate governance, Disney started moves toward reform under Eisner's reign. The most noteworthy event in that evolution, however, was the division of the chairman and chief executive roles -- which can hardly be characterized as voluntary -- after the shareholder votes were counted in Philadelphia.
Some have called for Iger to reunite the roles, but he has declined. Further, Disney last month announced it was creating the new post of senior vice president of corporate responsibility.
As a result, Disney has gone from a poster child for bad governance to a model for reform, according to corporate watchdogs. As of Nov. 19, Institutional Shareholder Services gave Disney a Corporate Governance Quotient score that was better than 98.3% of all S&P 500 companies and better than 100% of media companies.
Where did Disney's governance quotient stand, say, before the 2004 annual meeting at which Eisner lost his chairmanship? The company's 2003 rating was an abysmal 22.2% compared with other S&P 500 companies.
"They're now proactive instead of reactive," said Patrick McGurn, Institutional Shareholder Services' executive vice president and special counsel. "Shareholders are largely satisfied the company's moving in the right direction as far as performance issues."
At this year's shareholder meeting near Disneyland in Anaheim, Calif., Iger presided over a markedly more subdued affair than the gathering in Philadelphia two years earlier.
Indeed, it seemed to soothe shareholders, who were impressed with Iger's plans for restoring the company's core business: animation. He yielded the podium to John Lasseter, the Pixar creative genius behind "Toy Story" and numerous other efforts, who now is overseeing Disney's animation operation.
"I just like that [Iger] understands the meaning of Disney -- Walt Disney's dreams and ideas," said Betsy Goode, a longtime shareholder from Cincinnati. "It's not all about Bob."
Whether Iger is in a mere honeymoon period with shareholders and employees remains to be seen.
The July move to reorganize the company's film unit to cut 600 jobs will result in fewer movies. Most of the company's films will come out under the Walt Disney Pictures nameplate as opposed to that of its Touchstone unit. More of those films than in the past will be family-oriented.
That's a move that might have ruffled the feathers of the company a few years ago but now seems to be accepted as a precondition of long-term health. Of course, it didn't hurt that, at the same time, Walt Disney Pictures' "Pirates of the Caribbean: Dead Man's Chest" was becoming the third film ever to clear the $1 billion mark in worldwide box office receipts.
"Financially, our results are so much better when we do a 'Pirates of the Caribbean' that's homegrown, something that was developed from an attraction built in 1966," said Cook, the studio chief. "And when we can do it right, it just lifts up the whole company -- whether it's publishing, consumer products or taking an attraction that was fairly old at the parks and making it new again."
Iger's also working on the company's image. In October, he said the company would eliminate added trans fats from food served at Disney parks. He also vowed to use the Disney name on products that limit calories, fats and sugar.
That comes on top of the numerous philanthropic projects the company continues to sponsor, contributing to such causes as Gulf Coast post-hurricane rebuilding, a national memorial for Dr. Martin Luther King Jr., and the Make-A-Wish Foundation.
The question at this point is how long Iger can keep it up.
Coming attractions after the company issued another in a series of strong quarterly reports last month, investors let some of the air out of Disney's stock, wondering whether it might be nearing a peak. It since has started to climb back up.
Chuck Oberleitner, an editor for O-meon.com, a Web site that follows all things Disney, agreed that Iger had done well in his first year, but he said he's curious to see how he follows up. "I would like to see him get a couple more years under his belt," Oberleitner said.
In addition, it's evident that some portion of Disney's recovery effort was in motion before Iger took the helm. Stewart said several ultimately successful ABC moves were made by underlings Lloyd Braun and Susan Lyne, such as developing "Housewives" and "Lost," but those executives were let go while Eisner remained in charge.
And, in Stewart's view, Iger is adept at nurturing others' successes.
"I have to hand it to ABC that even since they capitalized on that success, they've built a strong schedule and made, I think, some very smart moves," Stewart said. "And I think Iger deserves a lot of credit for that."
Stewart pointed out that Disney's plan to put out fewer films per year is a gamble in itself. Fewer films in the marketplace could easily translate to fewer hits.
And the Pixar acquisition, strategic sense aside, could yet backfire. Pixar may be due for a flop after seven straight hits. If its next release, "Ratatouille," doesn't do well in its June 2007 release, Disney may wonder whether it should have shelled out 11% its own worth for Pixar.
"It was bold," author Stewart said. "It solved a lot of problems that developed in that relationship. The one thing that I would say is it does seem like a full price."