Walt Disney Co Investors on Edge as CEO Succession Plan Falls Apart

This week, Disney (DIS -0.83%) COO Thomas Staggs abruptly announced his resignation after 25 years with the company. As if the loss of a key executive was not enough to shock investors, his departure also scuttled the succession plan that was in place when CEO Bob Iger retires in 2018.

In this week's episode of Industry Focus: Consumer Goods, Sean O'Reilly and Vincent Shen discuss some of the highlights of Staggs' impressive resume with House of Mouse, what may have led him to resign, and next steps for the company as it hurries to find a suitable candidate who can fill the role of both COO and CEO.

A full transcript follows the video.

This podcast was recorded on April 5, 2016.

Sean O'Reilly: Disney CEO heir apparent departs in what amounts to a big shakeup at the House of Mouse, on this consumer goods edition of Industry Focus.

Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is April 5th, 2016, and joining me in the studio is the indispensable Vincent Shen. What's up, man?

Vincent Shen: How are you, Sean?

O'Reilly: Not too bad. How are you?

Shen: You excited to talk about this story?

O'Reilly: I walk in this morning and I think I got a push notification from Bloomberg in the last 24 hours and I was like, oh that's no big deal. Then I walk in and you sent me that awesome article from New York Times? Maybe LA Times. You sent me an awesome article detailing it and I start reading it while sipping my coffee this morning and I'm like, this is a big deal. This was the guy that beat out the former CFO. Was that Jay Rasulo?

Shen: Yes, it was.

O'Reilly: I'm sorry if I butchered that last name there. He beat out the CFO for this chief operating officer role. He was expected to take over from the current CEO, Bob Iger. He's supposed to step down in two years, June 2018?

Shen: That's when his contract ends. Yeah.

O'Reilly: You got to wonder what was going on behind the scenes. We can speculate but I guess we'll never know, unless somebody writes a book some day. You did a lot of background research on what was going on with these guys, I did a decent amount myself, but I'm anxious to hear what you found.

Shen: Sure. Just to give some context for our listeners, a major reason why I wanted to talk about this today is obviously leadership after Bob Iger, whoever takes the helm for Disney, that's really important to the current shareholders. If you're thinking long-term, you want to know that the capable management [is] going to be in place. I would say most people over the past decade have generally been very appreciative of the job that Bob Iger has done, with certain key acquisitions, expanding through certain businesses, he's doing an incredible job.

O'Reilly: Correct me if I'm wrong, you're talking about buying Marvel, all of the stuff he's done.

Shen: Yeah. We'll totally get to that, because Staggs also had hands in a lot of those projects as well and those deals, especially when he was previous CFO for like 12 years. This also is just a really interesting intersect of not only the business side, but some of the personnel challenges. You mentioned to me before the show, some other famous companies that have run into problems in management shakeups when it comes to the succession to the coveted CEO role.

O'Reilly: Running a company is not all sunshine and roses, despite what many think.

Shen: Personally for Thomas Staggs, he announced that he'll be stepping down in May. He will serve out the rest of the fiscal year for Disney as a special advisor to the CEO.

O'Reilly: Yeah, to Iger.

Shen: Staggs joined Disney in 1990, before he did he was in banking at Morgan Stanley. When he did join 25-plus years ago, he was a manager of strategic planning. His rise through the company was really rapid. He became a senior vice president of strategic planning and development in 1995, five years after he started. He rose to senior executive vice president CFO by 1998. Within eight years of joining the company, he had taken on the CFO role. He served in that role for about 12 years and, as you mentioned, during his time as CFO he was, in his bio I think, they mentioned specifically some key deals he was involved in. The first one, the oldest one really, is Capital Cities/ABC acquisition. We know how significant that was. That was announced in August of 1995. It was before he took over the CFO title officially, but I'm sure he was involved, otherwise they wouldn't have mentioned that. A $19 billion acquisition at the time, I think it was the second-largest corporate takeover in history. This is a really big moment for Disney, because they combine their content creation resources with the worldwide distribution that ABC and Capital Cities enjoyed. This is the deal that landed them ESPN which now we know is ...

O'Reilly: It's their cash cow, their financial engine.

Shen: You can't overstate enough how important it is. There's a reason why last August, when Iger came out and said, "Hey, we're experiencing some losses with ESPN and some of our other cable properties," the entire industry took a hit with all the stocks falling. Disney shares were at over $120 I think. When that news came out they plummeted and they've rollercoastered since then. They're trading a little over $90 now.

O'Reilly: You see Disney's market cap right now is $157 billion, correct me if I'm wrong but ESPN is valued at like $50 billion.

Shen: Huge part of it. That was one of the first deals mentioned, but Staggs was also involved in Pixar, that was announced in January 2006. As the CFO at that point he was very much active in the deal-making process. Iger had just taken on the role of CEO a few months earlier before the Pixar deal.

O'Reilly: Am I correct in saying that Staggs was the guy that issued all of the stock to Steve Jobs with the Pixar acquisition?

Shen: Yeah, probably. Iger had mentioned at the time of the deal that he wanted to refocus the company on a lot of its animation roots. At that time, there was a lot of competition coming from Pixar and DreamWorks. Pixar had huge hits like Toy Story, Monsters Inc., Finding Nemo, The Incredibles. Disney paid $7.4 billion dollars for the animation studio. Since then ...

O'Reilly: That's all they do. Sorry to interrupt.

Shen: They've been involved in about 10 films since that deal was announced. Those films have grossed about $6.5 billion worldwide. That doesn't even begin to include the amount of merchandising tie-ins, tie-ins to their theme parks. They've had huge characters since the deal closed, think WALL-E, the Toy Story trilogy, you have Monsters University, things like that.

O'Reilly: Did I tell you what I witnessed at the line to see the Easter bunny a couple of weeks ago at the mall?

Shen: What did you see?

O'Reilly: Of course in the winter time they had in the same spot Santa and they had Frozen stuff everywhere.

Shen: Of course.

O'Reilly: They still had Frozen posters off to the side to see the Easter bunny. You know little girls are like, oh mommy.

Shen: Yeah, I'm sure. It still blows my mind the long tail that Frozen has had in terms of ... The movie came out in 2014 I think. [Editor's note: Frozen was released November 2013.] Kids are still crazy about it. I know the sequel is coming, I'm not sure of the expected release date. It's incredible how the toys and everything have continued to be so popular. With the holiday shopping lists, Frozen was still toward the top in terms of the most popular toys.

Moving on, another two deals that I want to touch on that Staggs was involved in during his time as CFO first was Marvel Entertainment. Think about this, August 2009, Disney goes shopping again. They pay $4 billion for this library of super famous characters.

O'Reilly: All these things we're talking about are what first come to mind when you talk about Disney today.

Shen: Ultimately what I'm trying to get at is how Staggs' tenure at the company has been through major major changes, very dynamic. Overall, big acquisitions or expansions that a lot of people would say are significant reasons why the company is so successful today. The Lucasfilm deal was after Staggs had moved on from the CFO role to become the chairman of parks and resorts. I wanted to touch on that really quickly, because they made that purchase, similarly like Marvel, for about $4 billion. Force Awakens itself, generated $2 billion in worldwide ticket sales and that's the first movie in the installment.

O'Reilly: I would kill to know how he figured out what to pay for these things. I would love to know that.

Shen: I think all of these deals involved a lot of bankers, a lot of people discounting cash flows. I've seen the valuation models, not necessarily in the entertainment side but in other industries but that's often what it comes down to.

The Lucasfilm was interesting, because it was solely owned by George Lucas. He just got a ton of Disney shares. I think he became the largest non-institutional shareholder after the Steve Jobs trust. For the most recent reported quarter, this Lucasfilm deal of $4 billion, Disney boasted a 46% year-over-year revenue increase in the studio entertainment segment. Operating income for that segment was up 86%. The consumer products and interactive media segment also saw a year-over-year income increase of 23%. They acknowledged the fact that this was all of Star Wars mania.

You hear about all these huge deals that Staggs was part of, and it also really highlights that these are some of the deals that Iger ... This is his vision. I think a big reason why this is such important news for shareholders is when Staggs took over as COO early last year, in February, people saw him being the natural person to step in once Iger retired. Everybody's going to be comparing him to the man who changed the company and really took it to the next level. That's why this decision is really making the news rounds. It's just a really important part of what the long-term future could be like for the company.

O'Reilly: I definitely want to move on to his time at park and resorts because he crushed that role. Before we do, I want to point out to our listeners that April is financial literacy month. In that spirit we are giving away 10 books to ten lucky winners. These books include favorite financial picks from David Gardner, Morgan Housel, and Industry Focus' own Kristine Harjes. To enter to win just go to podcast.fool.com and click on the yellow super podcast link at the top of the page. Once again that is podcast.fool.com.

Vince, before we came in here I went through the last five or six years of 10-Ks to look at the parks and resorts segment at Disney. From cursory knowledge I knew going in that they were probably going to be really good. Did not know that they were going to be as good as they turned out to be.

Shen: As we mentioned, Staggs switched his roles with that person that you mentioned earlier, that he beat out for the COO job, Jay Rasulo I think. They switched roles, Staggs went from CFO to chairman of parks and resorts. In that time, just to give you an idea of some of the things that he was involved in or responsible for, that segment includes a global team of about 130,000 employees.

O'Reilly: Which is probably their biggest employee base I would think.

Shen: I believe so actually. In that five years, from 2010 to 2015, he also oversaw massive projects. Shanghai Disney, I think they broke ground in 2011, $5 billion investment, largest international investment Disney's ever made, period. Then you have these huge expansions of parks that were already existing like the Avatar themed land in Animal Kingdom, they opened a spa and resort in Hawaii, they have new lands in Hong Kong Disneyland, expansion of a lot of the parks. When it comes down to the numbers, fiscal year 2010, parks and resorts revenue was about $10.8 billion, operating income about $1.3 billion.

O'Reilly: That was actually down from 2009 from what I saw.

Shen: Five years later, during Staggs tenure, revenue's up 50% and operating income is up about 130%. This is for Disney's second-largest segment, it's not like they were growing from a really small base. As of the most recent fiscal year, parks and resorts makes up about 31% of the top line whereas media works makes up 44%. It's a close second.

O'Reilly: In any of your research or reading, did you get any kind of read on why Staggs went to parks and resorts? Was it like, "Hey, this segment isn't doing so hot, you're my guy I need you"?

Shen: I actually did not see, but I think in terms of his background, a lot of people in Wall Street had a very positive view of him. When the news came out that the COO position heir apparent it was very positive. I think before he was in the CFO role, maybe more when he was in his wheelhouse previous to what he was doing in terms of banking. Taking on this more operational role, it was proof that he can run all of these different businesses if it comes to this race [for CEO].

O'Reilly: I wonder if that's what he was thinking or something like that?

Shen: Potentially so. That group has had record performance, and Bob Iger's acknowledged that as well. How incredible a job Staggs did during his five years heading that up. We come to this position now where he served as COO for just about a year and a half and now he's announced that he's stepping down. There's been some sources in the reports that I've seen like LA Times and Wall Street Journal that there's a lot of pressure from the board of directors. The questions come up. Iger basically groomed him and chose him like, "Hey, this guy's going to be COO." If you go to the management page on the Disney investment relations website, even the way it's presented, it looks like that's the case. You have Bob Iger at the top right next to him, Staggs as COO, and everybody else is below them. Even visually that seems to be the case. The board of directors was fine then, but now you hear that certain members of the board were uncomfortable with him and didn't think he was actually a good choice anymore.

O'Reilly: Did you come across any names? Wink, wink.

Shen: This is where we come to an interesting crossroads here of what happened behind the scenes and also, who now is going to be considered as a candidate. Just to give you some background, the board of directors has some incredible names. Bob Iger's on it, Susan Arnold from Carlyle, John Chen the BlackBerry CEO, Jack Dorsey of Twitter and Square, Aylwin Lewis who is CEO of Potbelly right now, Mark Parker of Nike, and Sheryl Sandberg. I mentioned her last because she is actually -- these are obviously rumors -- potentially angling for this position, wanting to move out of the shadow of Zuckerberg of Facebook and proving her chops at taking a CEO role for by far the biggest entertainment company around. That was something that was potentially hinted at in some of the sources that were reported. Another possibility here, because the market has reacted pretty negatively to the news, obviously a one-day short-term drop, I think people otherwise were very happy with the succession plan, having Staggs fill in. Now they're saying Iger's already extended his contract twice, he's 65. He's supposed to retire in June 2018.

O'Reilly: He wants to enjoy his hundreds of millions of dollars.

Shen: Is it possible that he just extends it again? I think two years honestly is plenty of time for them to find a potential candidate. At this point, after that race in 2015 between Rasulo and Staggs to fill the COO role to be the heir apparent ... A lot of strong candidates within the company have left already, knowing that that ladder up is filled essentially. If Iger isn't extended and it's not from an interesting internal position like Sandberg from the board, it will have to be an external candidate. That opens the company up to a lot of different questions, uncertainty. Will they be able to manage a company with so many different businesses? It's an interesting question.

O'Reilly: It makes me wonder, please give me your thoughts as well, it seems to me like, you're talking about the board not liking Staggs even though he's clearly Iger's buddy and they've worked together for 10 or 20 years on all these deals, Marvel and Star Wars and all this stuff. It makes me wonder if it has something to do with Disney's tradition of putting a creative person in the CEO role. Even Michael Eisner, fun fact he's one of the only people that have ever gotten on Forbes 400 list of richest Americans, he's worth $1 billion, solely by not owning a company, but from salary and stock option compensation.

Shen: Oh really? He had a pretty long run as head of Disney.

O'Reilly: He did and every year he got a lot of stock options. My point is he didn't build a business like Bill Gates. He ran ABC early on in his career. Iger ran ...

Shen: Was also involved with ABC.

O'Reilly: You see what I'm getting at here. I wonder if, even though Iger at some point was like, "Yeah Staggs, you crushed this parks and resorts thing, they'll know that you're my guy," and all that stuff. I'm wondering if it finally came to a head where we really still want a creative person, which I'm wondering if Sheryl Sandberg would have the same flaw.

Shen: I'm really glad you brought this up, because I had wanted to mention this and I had forgotten.

O'Reilly: I love you, Sheryl. I don't mean to pooh-pooh your odds.

Shen: Their ultimate focus I think, they obviously want someone who's well rounded. You either have somebody who's really well versed and has connections on the entertainment side or you have somebody who's more focused in terms of the finance side, the operations.

O'Reilly: Which is clearly Staggs.

Shen: Then you also could have somebody who is more focused on the technological side. That's where a candidate like Sandberg could help fill the role.

O'Reilly: It's 2016, we need a tech person, we need a social ...

Shen: Exactly. The issue last year that really hurt Disney share price is what is going on with ESPN, is that going to be sustainable? What has happened that has caused a lot of pain for the cable TV industry is the rise of a lot of tech options like streaming.

O'Reilly: We're going to need to make the shift to virtual reality which Facebook happens to have ...

Shen: Does that mean that the shift is moving away from somebody who is able to blow parks and resorts out of the ... Do a great job there but re-shift that focus to somebody who can think more about the future and where the company needs to go in order to stay at the top of the heap that it is right now.

O'Reilly: Got it. Cool. Well thanks for your thoughts Vince. This is good stuff. Have a good one!

Shen: Thanks Sean.

O'Reilly: If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected], again that's [email protected]. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have former recommendations for or against those stocks. Don't buy or sell anything based solely what you hear on this program. For Vincent Shen, I am Sean O'Reilly. Thanks for listening and Fool on!