Eisner's Wild, Wild Ride

By Daren Fonda

Never can it be said that Disney chief Michael Eisner misses the small points. Whether it's the fixtures in his company's hotels, the dialogue in a movie script or the little snubs that add up to a feud, not much escapes him. In the case of his growing estrangement from his longtime supporter Roy Disney, the final squabble came in a conversation a week before Thanksgiving over the Magic Kingdom heir's right to attend screenings of cartoons in development. "These were big screenings with like 100 people in the room, and he didn't want me there for some convoluted reason," Disney told TIME. "I griped about it, and we had some words." Then, like one of his Uncle Walt's animated boilers, Disney exploded.

Eisner, 61, has crushed numerous revolts in his 19-year reign as chief of the Walt Disney Co., but he has never faced a rebel quite like this--an angry major shareholder who bears the company's name and a deep sense of betrayal by the chief Mouseketeer. Claiming that Eisner made his life "intolerable" at the company, Disney last week resigned from his posts as chairman of the animation division and vice chairman of the board. With his longtime ally, Stanley Gold, who also quit the board, Disney plans to mount a public fight to boot Eisner from the kingdom. The advantage is still with Eisner, a bare-knuckles survivor, but the duo promise to dog him, says Gold, "for as long as it takes."

Their gripes are familiar to beleaguered Disney shareholders, who recall Eisner's wonder years like a ride on Space Mountain. Eisner had a terrific run from 1984 through '98, when profits grew from $291 million to $1.85 billion. He expanded the theme parks, heavily marketed Disney merchandise, turned the studios into tight-budget, live-action hit factories and presided with Jeffrey Katzenberg over a rebirth of Disney's animation franchise that produced such crown jewels as The Lion King. Investors from Warren Buffett to the Bass family latched on as the stock soared 3,598% during those 14 golden years. And Eisner cashed in. So far, he has exercised options worth roughly $850 million.

But that was his pixie-dust era. ABC, which Eisner bought for $19 billion in 1996, swung from earning $1 billion in operating income in 2000 to losing $36 million last year. Eisner blew at least $1.6 billion on Internet ventures, including the Go.com portal, and in 2001 he paid $5.2 billion for the Fox Family Channel (considered a high sum), which was renamed ABC Family and proceeded to slump in the ratings. None of this has been lost on investors: Disney stock wobbles at around $22 a share, half the heights it reached in 1998 and 2000.

The departing Disney rubbed it in by releasing a resignation letter to Eisner in which he said, "It is my sincere belief that it is you who should be leaving and not me," and listing seven grievances against Eisner. Disney blamed him for building theme parks "on the cheap," for presiding over a "creative brain drain," and for squandering the Disney name by creating a perception that the company is "rapacious, soulless and always looking for the 'quick buck.'" Dissent from Eisner's micromanagement style comes from other corners of the Mouse House too. Harvey Weinstein, co-chairman of Disney-owned Miramax Films, has told National Public Radio that if Eisner let him and Miramax go, "that might be a cause for celebration in all quarters, ours included."

While Eisner declined to be interviewed, a company executive claimed that Roy Disney was sniping from a weak position, that he was less interested in what happened at company headquarters in Burbank, Calif., than in sailing his yacht off the coast of Ireland, where he owns a large home in County Cork. "Roy has not opened his mouth at a board meeting in years," the executive said. "And Stanley would only complain incessantly and never offer alternatives."

Disney may have missed his best shot at Eisner last year, when the stock was hitting six-year lows and Eisner faced heavy pressure for chairing a board widely considered to be one of the least independent in corporate America. One of his survival tactics was to consent to reforms, paring the board from 17 to 13 members and setting up a long-awaited succession plan (Eisner has hinted that Disney president and COO Robert Iger will be next, though he reportedly keeps the name of his chosen successor in a closely guarded sealed envelope). To remove appearances that it was a rubber-stamp board, he did not renominate such directors as actor Sidney Poitier and architect Robert A.M. Stern. But another board member was conspicuously absent from the slate this year: Andrea Van de Kamp, chairman of Sotheby's West Coast and a harsh Eisner critic. Even the latest board addition, John Chen, CEO of Sybase, told a Bloomberg reporter, "Disney's board independence isn't very good."

Some analysts think Eisner has only strengthened his grip on the kingdom, since Gold and Disney may no longer sow internal dissent. Even though Disney is one of the largest single shareholders, with around 17 million shares in a company with 2 billion shares, his less-than-1% holding doesn't give him much leverage unless he can inspire a popular revolt. And firing Eisner before his contract expires in September 2006 could mean giving him a generous golden parachute. Moreover, investors who haven't already voted against Eisner by selling their shares seem to have surmised that the company may be mending. The firm enjoyed two blockbuster hits this year with Finding Nemo ($570 million in worldwide box office) and Pirates of the Caribbean ($647 million), theme-park attendance perked up last summer, ABC is starting to recover from its ratings free fall, and analyst David Joyce of Guzman & Co. forecasts that earnings will hit $1.7 billion (up 34.5%) in its next fiscal year.

To be sure, there's longer-term concern about Disney's profit machines, ESPN and the Pixar alliance that produced Nemo. ESPN growth may stall as cable operators balk at the 20% annual-fee increases that ESPN has charged over the past several years. Pixar, run by Apple's Steve Jobs, has little incentive to keep giving Disney a full 50% share of the profits from Pixar pictures, along with a distribution fee, in exchange for splitting the costs. Several entertainment companies are offering Pixar more favorable terms than Disney's old deal, and Jobs is said to be getting peeved by the protracted negotiations with Eisner. As much as ever, the head of the $27 billion empire is in the thick of things and sweating the details. --With reporting by Sean Gregory and Julie Rawe/New York, Jeffrey Ressner/Los Angeles and Chris Taylor/San Francisco

With reporting by Sean Gregory and Julie Rawe/New York, Jeffrey Ressner/Los Angeles and Chris Taylor/San Francisco