A corporate financial analysis of Disney

This is a corporate financial analysis of Disney. I do not expect you or want you to replicate this analysis, but you can use it to get a sense of how I would answer the project questions. In doing this analysis, I was constrained because I was looking at only one firm. If you are as a group looking at a number of firms, I would strongly recommend that you try to integrate your analysis. (In other words, doing separate reports for each company is not only repetitive, but it also robs you of some interesting comparisons that you can make across these companies.) For instance, in the first part, when I have a graph on corporate governance and show Disney alone, you could show more than one firm on the same graph. In other parts, where I have tables that compare Disney to the entertainment industry, expand the tables to include all your firms. In the discussion parts, focus not only on what is unique about your firm but also on what it has in common with other companies in the group.

Finally, there will be parts of this analysis where you will have more information or less information than I do, or where the information you have from different sources is not consistent. Work with what you have. Be creative, be bold and do not let yourself be constrained by conventional wisdom. Above all, have fun. I appreciate the effort

I. Corporate Governance Analysis

A. Management and Stockholders

Balance of Power:

At Disney, the power clearly resides with the incumbent management, and in particular, with the CEO, Mr. Michael Eisner. This power emanates not from any stockholdings that Mr. Eisner and other top managers have - they own less than 1% of the outstanding stock - but from the fact that the board of directors is composed almost entirely of insiders and people who are close to Mr. Eisner. (See Exhibit 1 for a listing of the directors, and their relationships to Mr. Eisner or Disney.) Note that

- Insiders (Current or Former executives at Disney) hold seven of the seventeen positions on the board.

- Of the remaining ten, quite a few have other connections with Mr. Eisner. For instance, Mr. Irwin Russell happens to be Mr. Eisner's personal attorney, and Ms. Bowers, the principal of the school that Mr. Eisner's child attends.

It is interesting that both Calpers and Fortune, with different ranking mechanisms, ranked Disney's board at the very bottom of their lists in terms of effectiveness, and independence from incumbent management.

Management power is accentuated by the fact that the stockholdings in Disney are dispersed widely, making it difficult for any one stockholder to exert pressure on managers to change their ways.

Source: Annual report; Fortune Magazine Rankings of Corporate Boards; New York Times Story on Calpers

Manifestations

The power of incumbent managment comes through in a variety of ways. In particular,

- The top managers of the firm have been compensated extraordinarily well in the last few years. In the most recent year, for instance, Mr. Eisner earned $8.25 million in salary and bonus. Over the last 5 years, his total compensation from Disney has amounted to $ 235.95 million. In addition, has received more than 8 million options from the firm over the period. (See Exhibit 2 for the compensation breakdown)

- When Disney parted ways with Mr. Michael Ovitz in 1996, and had to pay a substantial price (estimated to be $90-100 million) to do so, the board essentially absolved Mr. Eisner of all responsibility, even though he had brought Mr. Ovitz into the firm, and their failure to get along precipitated Mr. Ovitz's departure.

Source: Forbes.com/ceo for CEO compensation; WSJ story on Mr. Ovitz

Project Suggestion: If you are analyzing a foreign company, you might not be able to find much information on who sits on the board of directors or how much managers are paid. As a rule of thumb, the less information there is available on these matters, the more likely it is that stockholders have little or no control over the incumbent managers of the firm.

Managerial Performance

It has to be noted, in management's favor, that Disney's earnings and stock price performance during this period were stellar. Disney's earnings increased from $ 816 million in 1992 to $ 1533 million in 1997, and its stock price increased from $ 35 in 1992 to $ 75.38 in June 1997. On both measures, Disney did better than other firms in the market.

Stockholder Reaction

Stockholder reaction in the early years was muted to the power that resided with incumbent management and the efforts of Mr. Eisner to stack the board. The sheer magnitude of Mr. Eisner's compensation, and the failure of the board to hold him accountable for his actions, has lead to an increase in stockholder activism. This activism has manifested itself in the last year in the form of significant no votes on re-electing the board and as challenges to incumbent managers.

Source: WSJ report on Disney Annual Meeting

B. Firm and Financial Markets

Disney is a well-followed firm. Zacks reports at least 24 sell-side analysts who have made buy, sell or hold recommendations on the firm, providing estimates of earnings per share and future growth. While the firm provides substantial amounts of information about itself in the form