0 Where Eisner Went Wrong [Special] March 10, 2004

An unprecedented 43% of Disney(NYSE: DIS) shareholders gave the embattled Michael Eisner a vote of no confidence at the company's annual meeting last week. Eisner was stripped of his role as chairman of the company, though he remains as CEO.

OnThe Motley Fool Radio Showon NPR, David and Tom Gardner recently talked about the wonderful -- and not so wonderful -- world of Disney with Kim Masters, author of The Keys to the Kingdom: How Michael Eisner Lost His Grip. She attended the annual shareholder meeting last week and shared her thoughts with us. This is the second of three parts. All previous parts are linked right up there. ---^

TMF: We know about Michael Eisner's pay package. We know that in relative terms, I think it is fair to say that he has been very well paid for a stock performance than hasn't been very good over the last five to 10 years. Why do you think he has made so many enemies?

Masters: Well, he plays hardball to the point where it hurts him. This has been consistent. He did it with Jeffrey Katzenberg, the former chairman of the studio. He fired him. Jeffrey Katzenberg had a contractual right to a percentage of the money that was made from the projects he developed, like The Lion King. And instead of settling for about $90 million, which Eisner could have done, he engaged in years of fighting and protracted public humiliation. Michael Eisner ended up on the witness stand admitting that he "hates the little midget." Then, they paid Katzenberg close to $270 million instead of $90 million.

What they got for their money was humiliation and loss. This happened again and again. They fought with Pixar(Nasdaq: PIXR). And I just always believed that if you lose the relationship with Pixar, you have made the catastrophic mistake that Michael Eisner has always feared. He had always said he has seen one big mistake bring down companies or individuals. I think he made two big mistakes. He underestimated Roy Disney Jr. and he allowed the Pixar relationship to go away. You don't negotiate that kind of hardball tactic with talent that is so incredibly important to your company, but Michael Eisner did.

TMF: Kim, I remember reading a business textbook or two in the late '90s really talking about Eisner's achievement at Disney in the late '80s, and the way he designed an incredibly brilliant business model for that company. It did create a lot of value. Is it fair then to compare Eisner to a prizefighter that is still punching after his prime?

Masters: You know, he is certainly punching after they have invited him to leave the ring. The success at Disney was remarkable for the first 10 years. They made a lot of money just by raising theme park admission prices. They had never released an animated picture on video. Frank Wells, the No. 2 man at the time, said, "Every time we open a door, there is money behind it" because the company had been sort of neglected and paralyzed.

Tomorrow: Still ignoring shareholders.

David and Tom Gardner team up to bring you great stock ideas each month.

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