The Keys to the Kingdom (48 page)

That year, Disney made 43 percent of its income from filmed entertainment and only 35 percent from theme parks. (In 1984, the company relied on theme parks for nearly 80 percent of its operating income and movies provided only 1 percent.)
The Lion King
had also provided the number-one record album of the year. Disney's sitcom,
Home Improvement,
was the year's top-rated show. As a reminder of the company's depth, Disney sold thirty million copies of
Snow White
on home video.

In his annual report, Eisner commented on the many changes that had taken place in 1994. The death of Wells “was a horrible exclamation point during a tragic year,” he said. He added that Wells would have said that Eisner's surgery was a display of “excessive theatricality, showmanship, and risk taking.” But Eisner reported that he had run three miles through the Vermont woods before he sat down to write his letter. His recovery was well under way.

As Eisner recounted the “shocks and distractions” that Disney had endured, he mentioned Los Angeles fires, an earthquake in January, the loss of Wells, his own heart surgery, the death of board member Sam Williams, and Katzenberg's “decision not to renew his contract.” (The earthquake and fires, as well as a series of tourist murders in Florida, did nothing to help the theme-park business. Eisner didn't mention the demise of Disney's America among his woes.)

Eisner reflected that Disney was a company that attracted unusual scrutiny and “when we release a disappointing movie or make a decision some find questionable, we get criticized with…intensity.” But the company's financials showed that “Disney is stronger than most have given us credit for, that we can withstand all kinds of adversities and still produce the financial results of a winner…. Our critics did not stop us. Frank's death did not stop us. My heart surgery did not stop us. Our studio reorganization did not stop us.” Truly, Disney was a juggernaut. The stock market, which had valued the company at $1.8 billion in 1984, now reckoned its worth at more than $28 billion.

 

THE EXODUS OF
Eisner's old guard continued. Helene Hahn, the petite but tough-as-nails head of business affairs at the studio, had immediately
followed Katzenberg to DreamWorks; so had Gary Kreisel, who ran television animation, and Ann Daly, the head of home video. Rich Frank, who had been with Eisner since the Paramount days, made it until April 1995.

In the wake of the studio reorganization, Frank ran television, cable, home video, and telecommunications. Over the years, Frank thought, he had also brought a valuable element to the mix at the studio. Katzenberg, always rushed, lacked the ability to connect with employees. But Frank made time to listen to his staff's anxieties and concerns, professional or otherwise. “If people came into Jeffrey's office, he would give them two minutes and take calls while they were there,” Frank says. “I spent a good 30 percent of my time with people who worked for us, keeping it going from a personal standpoint…. It wasn't that Jeffrey didn't care. That's just the way he was.” Frank joked with Katzenberg, “You work the morning shift, I'll work the night shift.” He was the one who went for drinks after work, while Katzenberg was all business.

He was also ambitious and increasingly visible, lobbying the Federal Communications Commission, serving with Vice-President Al Gore as head of a summit on the information superhighway, and putting in his second term as president of the Academy of Television Arts and Sciences. But he had a provision in his contract stating that he would have a shot at Katzenberg's job if it became vacant. If he didn't get it, he had the option to leave in six months with his retirement benefits and stock options—the latter valued at more than $30 million. (Also, when his title changed from president of the studio to chairman of the newly formed television and telecommunications group, his contract provided that he could leave the company with his benefits and options.)

When Katzenberg left, Frank expressed his sorrow. “Frank Wells died. Now Jeffrey's gone,” he told the
New York Times
sadly. “The family's been broken up.” But he vowed to soldier on. A former Disney executive says that despite Frank's long hours and increasing visibility, Eisner thought Frank had lost his fire. Dean Valentine, then Frank's deputy, says that was hardly the case. “The idea that Rich was lazy in any shape or manner is a disservice to the truth,” he says.

Another theory held that Eisner actually was uncomfortable with Frank's ambition. “He was really lobbying for some [more] senior management position,” an inside observer says. “It was never going to happen. Michael was fond of Rich but didn't feel a deep kinship with him—or with anybody.” Frank concurs on the latter point: “I liked Michael. I wouldn't have stayed
there for nineteen years if I didn't respect the guy and think he was terrific…. Overall, I think he's basically a good person. [But] I think Michael finds it a little difficult to truly open himself up.”

Frank also clashed with strategic planning chief Larry Murphy. He wasn't the first to have problems with Murphy, who was another Marriott alumnus; Katzenberg had been so contemptuous of Murphy that he declined to work with him and refused to invite him to annual planning meetings. Eisner had a catchphrase that he frequently used when considering a proposal: “Tell me the parade of horribles.” To Katzenberg and to Frank, providing the most pessimistic possible view of any proposal seemed to be Murphy's only job. Eisner was naturally risk averse, so it was difficult to get him to pursue new ventures as it was. Katzenberg thought Murphy and his people represented a kind of “strategic gestapo” that strangled many initiatives in their cradles.

Frank also believed that Eisner allowed Murphy to stifle ideas—especially the one that he and Katzenberg had pushed so passionately for so long: the acquisition of a network. Frank shared Katzenberg's hostility toward Murphy—and in nearly identical terms. “Michael used [strategic planning] as a police force—almost a gestapo group,” he says. “That was the last straw for me…. Larry Murphy would say, ‘You did twenty movies last year. Think how great we would have been if we didn't do these ten.' I would say, ‘Here are the twenty for next year. Tell me the ten we shouldn't make.'”

The company became overanalyzed by strategic planning, Frank continues. And unfortunately, Murphy didn't have a clearly defined point of view. “Larry always switched his mind depending on where Michael was,” Frank says. In one staff meeting, Frank tried to get Murphy to lead off with his opinion about a proposal under consideration. “He said, ‘I don't want to go first,'” Frank remembers. “Michael said, ‘Why are you doing this?' I said, ‘Because whatever he said to me yesterday, he's going to switch when he finds out what you think.'…I used to say to [Murphy], ‘I know you're not a yes-man. If Michael says no, you say no.'”

In Frank's opinion, “Larry Murphy [was] the single biggest negative factor in the Walt Disney Company.” When Disney was working on a cruise line to launch in 1998, he adds, executives joked that they hoped Murphy would go out on the first ship and it would meet the fate of the
Titanic.

Frustrated by Murphy's interference—as well as Eisner's ongoing refusal to buy a network—Frank started to remind Eisner about his deal. He hadn't
gotten Katzenberg's job and his contract gave him the option to leave. If he were going to remain, Frank said, Murphy had to be kept out of his affairs. “We went through a number of times where I was told [he] wouldn't interfere, and at the end of the day, that just wasn't the case,” Frank remembers.

On March 2, 1995, the
Los Angeles Times
reported that Frank was mulling over his departure from Disney. Frank denied that, as did a Disney spokesman. But in fact, Frank had confronted Eisner about his deal and the two men had a tense discussion. Finally Frank said he intended to leave. Eisner replied, “You can't. I won't let you.”

“I can and I am,” Frank replied. “And since you're not going to change, and I'm not going to change, there's nothing you can do about it.”

“How about your stock options?” Eisner reportedly answered.

Frank protested that Eisner owed him that money.

“I'm not disputing that,” Eisner is said to have shouted. “I'm just saying that if you walk out the door, you're going to have to sue me to get it.”

Eventually, Eisner and Frank reached a settlement in which Frank collected his money but agreed not to work for Katzenberg for two years. Frank was stunned when he heard rumors that his replacement would be Dennis Hightower, an executive from the consumer-products division who had no television experience at all. Frank dismissed these reports as implausible. How could a person who had been selling plush toys in Europe take over the entire Disney television, video, cable, and telecommunications operation?

Frank buzzed Eisner. “There's a rumor that Hightower's taking my job,” he said.

Eisner was evasive, but called Frank a few hours later and confirmed that Hightower was getting the position.

“He said we were going to go in a few minutes and announce it to the entire group, and he wanted me to be there,” Frank says. “He basically wanted me to endorse it. I said obviously I would come to the meeting but I certainly wasn't endorsing it. He never asked me if I thought this would be a good choice or not.” When Eisner made the announcement, Frank says, “to say there was shocked disbelief around the table would be one of the all-time understatements.”

Eisner felt that with his own television experience, he could help Hightower learn the ropes. “Now at least we have an enthusiastic executive in
the job,” Eisner told the press at the time. “Dennis is excited to be running TV. He's not disappointed to not be running movies.” Besides, he said, “Dennis Hightower is a very smart man.” Though he lacked experience with the major networks, “he's very experienced sitting down with our partners in Luxembourg and Taiwan,” Eisner said.

It quickly became apparent that Hightower, fifty-five, lacked the seasoning to run the $4 billion division. “There was just too much for him to learn too quick,” Frank says. “He didn't know the people. How do you call [a network] and say, ‘Can we talk about the schedule?'” Hightower lasted only a year and Eisner's reorganization of the company quickly broke down as Frank's responsibilities were divided up again. Roth took control of network television programming and home video, reassembling much of Katzenberg's old empire. Animation remained a very notable exception, though Roth was in charge of marketing the animated films.

Frank's departure did little to ease an increasingly nervous environment at Disney, and Eisner came under fire in the press for his autocratic management style. The
Wall Street Journal
commented that Eisner appeared to be “increasingly isolated.” Eisner responded: “If all of a sudden people think I'm not the goofy little seventies executive with unkempt hair standing on a soundstage, that may be. But I have a different job today. My job is to keep the quality and the vision of our company intact.” His most important mission, he added, was to “make sure the baton gets passed from one generation to another.” This seemed an odd declaration from a man who had refused to install a second-in-command after Frank Wells's death and his own cardiac episode.

He also argued that the longevity of his relationships with Katzenberg and Frank proved that he was not a bad boss. “One of these men worked for me for eighteen years, the other for nineteen years,” he said. “It's hard to say that nobody can work for me. I've had many close relationships with little turnover throughout my career. This is not an issue.”

But the press kept up the drumbeat, with the naughty
New York Observer
reporting that Disney employees were suffering under “what has been alleged as [Eisner's] ‘paranoia,' his seeming unwillingness to countenance dissent and what insiders term his ‘erratic…removed-from-reality decision making.'” Some staffers insisted that their calls were being monitored. (When a staffer was suspended for sending a fax to someone who worked for Katzenberg, it seemed that they were.) There were some suggestions in
print that the medication Eisner was taking after his heart surgery was interfering with his judgment. “Michael has lost it,” one employee said. “He has become Captain Queeg.”

Even Barry Diller seemed to concur in an April 1995 interview with
Fortune
. “Michael is competitive, but he's also paranoid,” he said. “Eighty-five percent of his toughness is for good reasons; 15 percent is over the line. There is an excessiveness that has always bothered me.”

Eisner acknowledged that his behavior might be more extreme than it was before his illness—though he also argued that Disney was perhaps not as tough a place to work as other, less visible companies. “I have less patience for betrayal than I had,” he conceded. “I deal with a broad range of talent and if the talent is really there, I will put up with a lot. But there is a whole level of maybe not really talented people who really test you. I am less patient with that group now.” Besides, he added, “If you're soft and fuzzy, like our little characters, you become the skinny kid on the beach, and people in this business don't mind kicking sand in your face.”

A
S SOON AS
DreamWorks sprang into existence, it became part of a chain reaction that would change the face of Hollywood. One domino fell after another, remaking the industry's power structure. It all began with speculation about the role that the new company would play in shaping the fate of MCA, now in turmoil as Lew Wasserman and Sid Sheinberg joined in battle with Matsushita. By now Wasserman, eighty-one, had headed the company for forty-eight years; the fifty-nine-year-old Sheinberg had been president for twenty-two years. Their frustration with Matsushita's control had been exacerbated when the Japanese declined to back the purchase of Virgin Records in 1991 and, more recently, when they vetoed plans to open a theme park in Japan and wouldn't even hear a proposal to acquire a stake in a television network. If Matsushita wouldn't go along with such moves, Wasserman and Sheinberg thought, MCA could not keep up with its rivals. For its part, Matsushita was worried about problems developing in the Japanese economy. They also worried that purchasing a stake in a network would roil anti-Japanese sentiment in the United States.

As the new DreamWorks venture was being announced, Wasserman and Sheinberg were scheduled to meet with Matsushita executives the following week to discuss their future. They were adamant about winning more autonomy. There were rumors that if they were successful in wresting some control of MCA, they would form some kind of combination with Universal and with DreamWorks.

Spielberg had made it clear that if Wasserman and Sheinberg weren't happy, he would take his talents elsewhere. He had even asked Sheinberg if he would like to become the fourth DreamWorks partner, but Sheinberg declined. Undoubtedly, Katzenberg was greatly relieved; the older Sheinberg was even more used to being a hands-on executive than he was.

If the talks with Matsushita were unsuccessful, the clear threat was that
Wasserman and Sheinberg would quit, causing a rupture even more dramatic than the Katzenberg departure from Disney. It wasn't just the loss of Wasserman, a true Hollywood patriarch known as the “godfather” of the industry. The studio would also lose Spielberg, the man who had minted money for Universal that year with the top-grossing picture of all time to date,
Jurassic Park,
and brought it prestige and profit with
Schindler's List.
The prospect of so damaging a breach could hardly have appealed to the Japanese. At the same time it was clear that tradition-bound Matsushita did not relish being bullied by its managers in Hollywood—and with Sheinberg talking quite openly with the media, the company particularly resented the public nature of the fight.

By December, Matsushita hired the investment banking firm of Allen & Company, along with Goldman, Sachs and the New York law firm of Simpson Thacher & Bartlett, to provide advice. Herbert Allen insisted that Michael Ovitz should be brought in as a consultant. It was Allen & Company's job to place a valuation on MCA and offer a list of options for Matsushita, including a possible sale. Sheinberg and Wasserman saw some hope that Ovitz might help them smooth things over with Matsushita and explain to the Japanese that they were extremely valuable assets. Ovitz said he would do his best.

But in fact, Matsushita had decided not only to wash its hands of Wasserman and Sheinberg but to get rid of most of its holdings in MCA as well. In April 1995, rumors started to swirl that Edgar Bronfman Jr., the thirty-nine-year-old heir to the Seagram fortune, had made a preemptive offer to buy MCA. Tall, slender, soft-spoken, and studiously polite, the young Bronfman was a sometime songwriter and film producer who pursued a career in show business instead of going to college. Eventually, he joined the family business and emerged as his father's successor. But he wasn't satisfied with the company's extensive beverage-and-liquor empire and had started to cast about for opportunities in the entertainment world. His approach to Time Warner had been rebuffed. But buying MCA was as dramatic an entrance as anyone might want to make.

During the negotiation, Matsushita had insisted on strict secrecy. Once news reports of the talks appeared, Edgar Jr. sought Matsushita's permission to have a conversation with Wasserman and Sheinberg. He pleaded that the Bronfmans' silence was an embarrassment in light of the published accounts of the discussions. Matsushita relented and Edgar Sr. made a courtesy call to Wasserman. It was too late. Wasserman and Sheinberg already
felt that they had been treated shabbily. Edgar Sr. knew Wasserman only vaguely but says he understands Wasserman's feeling. “Lew sort of looks at himself as the emperor of Hollywood and felt he was owed a call,” Bronfman says. “And in that regard, he was.” Bronfman promised in the Wednesday-afternoon call that he would phone Wasserman at once when an agreement with Matsushita was signed.

The deal was announced the following Sunday, and the next day, the Edgar Bronfmans junior and senior paid a visit to MCA's famous black tower to have lunch with Wasserman and Sheinberg. It was a difficult meeting. Both Wasserman and Sheinberg were agitated. “It was very rough,” Edgar Sr. recalls. “They were screaming about the fact that nobody had told them anything.” They were also worried about the future. Who would manage the company? Both were fearful that the Bronfmans would choose Ovitz, whom they now believed had betrayed them.

When Edgar Jr. said no decisions had been made, Wasserman replied, “I don't believe that. How can you buy a company without deciding what management is going to be?” Sheinberg was livid, accusing the Bronfmans of bad faith for not letting him and Wasserman know that they were seeking to buy the company. “In life, there's right and wrong,” he said.

Sheinberg says he's not surprised that the Bronfmans—particularly the father—were affronted. “I don't think Edgar Sr. is used to people telling him what they think about his behavior,” Sheinberg reflects. “I think he's used to people bowing. [But] I think it was a horrendous rudeness and simply unacceptable behavior, whether or not we owned the company at the time. Lew Wasserman was the founder of the company. There is only one Lew Wasserman in the United States. There isn't enough money in Swiss banks for Edgar Bronfman to ever be of the stature of Lew Wasserman and it was rude and I told them.”

Edgar Sr., who had never met Sheinberg before, was thoroughly put off. “I wouldn't buy a toy store and hire Sid to run it,” he says. “I think he's an idiot, an egocentric maniac. I finally said, ‘Enough of this.'…I don't like being yelled at, especially by a piece of shit like Sid Sheinberg.”

Edgar Jr. responded by laying out the options bluntly. “Look, there are two ways to deal with this,” he said. “The first is to decide that you love the company you built and you'll help the new owners figure out how to keep the company going. Or you'll decide you're so angry you're going to leave. Either outcome is okay with me. I would prefer the first but I can live with the second.”

Sheinberg says he agreed to help during the transition but said he wouldn't stay indefinitely. On that unsatisfactory note, the parties split up. The two elder men went to Wasserman's office while Edgar Jr. remained with Sheinberg. In the meeting with Edgar Sr., Wasserman relented. “I just want Sid to be okay,” he said. After that, says Edgar Sr., “We played that game Lew loves to play called Presidents Lew Has Met. We went to the bathroom to wash our hands and I asked Lew to be on our board.” Meanwhile, Sheinberg told Edgar Jr. about the horror of dealing with Matsushita. He talked about having written a letter to the management there and having not, as yet, received even the courtesy of a response. To which Edgar Jr. said, “I'm the response.”

“I suppose you are,” Sheinberg conceded. The two agreed that Sheinberg would leave the company with a rich production deal.

Bronfman turned to Michael Ovitz, the superagent. A deal for Ovitz to run MCA seemed so certain that the
New York Times
actually reported on June 5 that Ovitz along with his number-two man, Ron Meyer, and several other CAA agents, were taking the helm there in a move that would “profoundly alter the landscape of Hollywood.” But the report was premature. Ovitz and Bronfman engaged in a protracted, high-profile negotiation that finally collapsed.
Newsweek
was chagrined to find that it had Ovitz on the cover of its June 5 issue but no deal to justify its coverage.

In early July, Hollywood was turned on its ear again. To the shock of everyone in the industry, Bronfman hired Ron Meyer for a lesser version of the job that would have been offered to Ovitz. Meyer was good-natured, often having smoothed the feathers ruffled by Ovitz. But Meyer was a high-school dropout who openly proclaimed his own lack of formal education. He was affable but not a man that the industry expected to see in such a high position at a studio—at least not without Ovitz. Now it turned out that Meyer was Cinderella, and Ovitz—having alienated many of his associates with his apparent willingness to leave CAA—was to be left behind.

Ovitz had flown to Herb Allen's annual Sun Valley retreat a day before Meyer's new job was announced. When he learned that Meyer and his new boss, Bronfman, were headed to Sun Valley, too, he packed his bags and went home. “I just don't feel comfortable,” he told Eisner, “at someone else's coronation.”

 

ON HIS SECOND
visit to the Sun Valley retreat, Eisner was pleased to discover that he and Jane had been promoted to a condo instead of a room in the lodge. He charmed the crowd with a jovial, self-deprecating presentation even while he offered up impressive figures on Disney's performance. After his presentation, he quietly did what Katzenberg and Rich Frank had implored him to do for so long: quickly and secretly, he put in motion a deal to acquire a television network. It started in earnest when Eisner ran into Warren Buffett, the largest shareholder in Capital Cities/ABC Inc., and said, “Do you think our two companies could do something together?”

This was not an unrehearsed question. The day before he left for Sun Valley, Eisner had conducted an in-house session with his strategic planning team to discuss the idea of buying a network. Larry Murphy, the head of the division, had long opposed the plan, but there was an aggressive new player in the room. Stephen Bollenbach, the former chief executive of the Host Marriott Corp., had just joined Disney as its chief financial officer. (His predecessor, Richard Nanula, had been dispatched to run the Disney stores.) Bollenbach had engineered a major restructuring at Marriott. Before that, he served as chief financial officer to Donald Trump's company and helped the flashy developer escape from near bankruptcy.

Eisner knew that Bollenbach had an appetite for the top job at Disney, but was confident that he lacked the entertainment background to get it. Before Bollenbach figured that out, however, Eisner thought Disney could benefit from his strategic skills. And the time was right to make a deal. Eisner still believed that Disney stock was undervalued and Eisner's image wasn't what it had been, either. Both he and the company could use a boost. From the start, Bollenbach argued that Disney was perfectly situated to make a major acquisition. Interest rates were down. The company's debt was low and Disney would derive tax advantages from borrowing. So by the time Eisner appoached Buffett at Sun Valley, he was prepared to act.

Buffett responded positively to Eisner's question about selling Cap Cities/ABC. “You should go find Tom,” he suggested. He was referring to Tom Murphy, the chairman of Cap Cities/ABC. The three had a short conversation, Eisner said later. He remembered asking, “We're buying. Are you selling?”

“I'll get back to you,” Murphy replied.

Eisner was filled with excitement; he sensed that Disney was on the
brink of making a deal. He confided in Barry Diller, also attending the Sun Valley retreat. Diller had been frustrated in his own attempts to buy ABC and CBS—just two months earlier, he had made an unsuccessful run at the latter network in partnership with Disney. Now Eisner couldn't resist asking Diller whether he'd be interested in running ABC. Diller looked at his former employee and smiled. He doubted that he would, he said.

By the end of the month, the second-largest acquisition in U.S. history to date was rapidly and quietly sewn up. Disney, so reticent for so long, briefly became the world's largest entertainment company (surpassing, but soon to be surpassed again by, Time Warner) with the $19 billion purchase of Capital Cities/ABC Inc.

On the night that the Disney board approved the deal, Eisner had dinner with his mother. From there, he went to the law offices of Dewey Ballantine to review the last details of the deal. The next morning, the news broke.

The move transformed Eisner's image from a somewhat paranoid, isolated cardiac patient to brilliant deal maker. “This rejuvenates him just when he needs it most,” Viacom chairman Sumner Redstone told
Business Week
. With the acquisition, Disney bought the broadcast network, ten television stations, twenty-one radio stations, as well as significant ownership of Lifetime and the Arts and Entertainment Network. To Eisner, one of the crown jewels of the deal was the powerhouse ESPN sports channel, seen in 66.3 million American homes and 95 million around the world. Eisner called ESPN “a magic name,” comparable with Coke or Kodak. Disney had also secured a guaranteed outlet for its programming at a time when federal regulators were permitting networks to own more of their own shows. Disney could sell its own shows to ABC and resell to its cable channels and television stations for reruns.

When the news came, Hollywood was once again stunned. After the drama of Wells's death, Eisner's cardiac episode, Katzenberg's departure, the advent of DreamWorks, the sale of MCA, the departure of Wasserman and Sheinberg, the suspense surrounding the failed Ovitz negotiation, and the ascension of Ron Meyer, it seemed as though astonishing news simply would not stop coming. Now Disney had remade itself with one bold stroke. Its market value was $40 billion and Disney became roughly the eleventh-largest company in the country. It was more than a Hollywood story—it was major national news. But still, Eisner asked a
Los Angeles Times
reporter, “Do you think this [story] will make page one?”