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The BLOGFlume—Dollars and Sense

A decision in the Ovitz trial, and surprising 2nd quarter earnings reports.

Written by Russell Meyer
Published: August 10, 2005 at 6:59 PM

Ovitz Case Ruling
Washington Post 8/10/05

In a time when Enron, Adelphia, and MCI/Worldcom executives are being sent to jail for overstepping their bounds, former Disney executive Michael Ovitz was granted his $140 million severance package by a Delaware court. It seems that hiring someone, and then forcing them out 14 month later without any sort of shareholder approval is just fine. Disney shareholders were trying to get some reciprocation from Ovitz in this case, but the court felt that the Disney board had the right to make executive moves, and to construct contracts for fellow executives. The $140 million severance after a mere 14 months of work with Disney does seem rather absurd, and the lawyers arguing on behalf of the shareholders alerted the court to this ridiculously generous “payout.” However, the court again stood on the side of the Disney board, and their right to make decisions regarding the hiring, firing, and constructing the contracts of executives.

Did the court make the right decision? Legally speaking, it seems they did. There was no evidence of impropriety, and despite how “fishy” the severance package of Ovitz looks on paper, it was well within the right of the board to structure his contract in any way they saw fit. This case did not involve a financial blunder, poor accounting, or document shredding. Ovitz was clearly not the right person for the job, and the Disney board clearly made a huge error in hiring him, only to let him go 14 months later. However, should the board of a corporation be held responsible for every bad decision it makes? If that were the case, corporations would never grow, because their boards would be so scared to make bad decisions that risks would never be taken. The board of a corporation needs to be given some flexibility and autonomy to be able to run the company without having to defer to shareholders before moving forward.

While ruling in the board’s favor, the court still reserved a few stern words for Michael Eisner, who was blasted for being the “omnipotent and infallible monarch of his personal Magic Kingdom” and not keeping shareholders informed of his decisions. Still, in the court’s eyes, Eisner and the Disney board were absolved of making this very expensive mistake, and in turn have set a precedent for corporate law. This case has given some power back to corporations, and has dealt a blow to shareholders. While this decision does not give corporations carte blanche, it does reduce the chance of shareholder lawsuits over every single bad decision, in turn affecting the value of stock.

Two Different Directions
Forbes 8/8/05
Point Buzz 8/3/05

It seems that the two largest owners of regional theme parks in the US are moving in two different directions, and it’s not what the theme park community would necessarily expect. Six Flags reported a profit of $5.6 million for the second quarter of 2005, versus a $12.3 million loss for the same period in 2004. Six Flags has continued its slow return to profitability, and let’s not forget that the second quarter of 2005 included the incredible public relations nightmare of Kingda Ka’s extended downtime. Meanwhile, Cedar Fair’s report was not so rosy. While Cedar Fair experienced a net revenue increase of 3%, attendance at its theme parks was down 2%. Cedar Fair blames its attendance decline on a poor economy, but the last time I checked, the economy was on an upswing, so much so that the Federal Reserve continues to make quarter-point increases in the prime interest rate. Cedar Point and Geauga Lake appear to be the biggest culprits contributing to Cedar Fair’s overall weak performance. Cedar Point had a 4% attendance decrease while Geauga Lake had a less-than-expected 7% attendance increase.

Can this be real? Six Flags is outperforming Cedar Fair? Six Flags has focused its resources on its new flagship Great Adventure, and provided just enough enhancements at its other parks to maintain attendance numbers. Cedar Fair’s flagship, Cedar Point, has not lived up to its reputation as the “roller coaster capital of the world,” and has not added a new coaster since 2003’s Top Thrill Dragster. However, Cedar Fair has made major investments in its other parks with major coasters. Knott’s Berry Farm (Silver Bullet), Dorney Park (Hydra), and Worlds of Fun (the soon-to-be-announced B&M invert rumored to be called The Patriot), have all received coasters, while Cedar Point has been left with a flat ride (maXair). In fact, Cedar Point is reportedly losing a coaster. While the sale of an unnamed coaster (probably Wildcat) will likely pave the way for the addition of a new coaster or coasters, Cedar Fair may have a hard time reversing its fortune, as Six Flags continues its upward momentum. Of the four Cedar Fair parks I’ve been to, all of them are superior to the many Six Flags parks I’ve been to, so it’s difficult for me to fathom how Six Flags is flourishing, while Cedar Fair is floundering. Analysts predict that the trends will continue through the third quarter, and this reversal of fortune may extend through the winter months as well. Maybe we’ve been a little hard on Six Flags, and not hard enough on Cedar Fair.

Readers' Opinions

From TH Creative on August 11, 2005 at 7:34 AM
Man the last year and a hald has seen Disney win one corporate battle after another.

They fend off the takeover attempt by Comcast.

They fend off the Pooh lawsuit.

They avoid labor problems in Florida by getting workers to sign off on new contracts

They placate Roy "Fredo" Disney ("You can't fire me I quit ... unless you pay me off.") so that he calls off his internet hissy fit.

They lure producer Scott Rudin from Paramount.

They get a new CEO whose early moves have won praise from Wall Street.

They kick started ABC.

And now they win the Ovitz suit.

All Iger needs to do is ink a new contract with Pixar and he's pretty much golden.

From Derek Potter on August 11, 2005 at 7:52 PM
Geauga Lakes numbers still aren't that great. The first half of the waterpark and great operation of the park has made some headway, but not quite as much as Cedar Fair thought it would. It seems as though the Cedar Fair board finally realizes that ditching the marine animals made a bigger impact on attendance than they thought. The animals were expensive, but they would have been the distinguishing mark of Geauga Lake, and it would have given nearby Cedar Point fans and visitors a real reason to visit the park. Still, things are getting slowly better for Geauga Lake, and the other half of the waterpark, the half that will cater more to adults, will be built next year. Attendance isn't up as much as expected, but it's slowly getting better.

It seems that Cedar Fair is spreading the wealth a little bit as well. Geauga got the waterpark, Dorney Park and Knotts both got roller coasters, and Worlds of Fun is getting a significant ride for the first time in who knows when. Meanwhile, the company is still locked up at Michigan's Adventure. The local government seems to have a bit of a problem with supplying the park with an adequate sewer and water service, and Cedar Fair smartly isn't building anything there until that happens.

As for Cedar Point, I consider them "victims" of rapid expansion. For the past 10 or so years, the flagship has enjoyed a string of coaster hits, a great reputation and plenty of money to build the next big thing....then Top Thrill Dragster hit. The Point has spent boatloads of cash getting this ride to finally run right, and I think they are just now recovering from it. Then, when Cedar Fair found out that Six Flags was selling out, they bought Geauga Lake....probably cutting into ride budgets, shifting plans, and moving back rides to do so in the process. Then they built Castaway Bay, an indoor waterpark, into one of their hotels...all this in the last 2 years. The B&M coaster that was supposed to be built in 2004 never happened, although it's not a dead issue yet. Cedar Fair is not a company that spends freely, but maybe they should have slapped down a little extra moolah on the table the past couple of years instead of playing it safe. MaxAir is a great flat ride, but fans and visitors come to Cedar Point for coasters. Next year will be 3 years removed from the last coaster built, and history says that this usually means something big is coming. It better be soon though, because the Point's attendance won't be increasing any next year either without a coaster.

There was an article recently about the mayor of El Paso being in Cleveland visiting Cedar Point shopping for coasters. The thing is that Cedar Point isn't in Cleveland, its 75 miles away in Sandusky. Geauga Lake is in a suburb of Cleveland....so which park were they talking about? If they are saying Cedar Point, there are three possibilities that I can think of. First off is Disaster Transport. This rethemed bobsled is just that, a disaster. It's horribly themed, and it sits on prime real estate...right on the beach...in an area of the park that they have been greatly improving and expanding the past few years. Next off is an obvious option, the Wildcat. This ride was designed to travel, but has found a home at the Point for a long time now. It still is a decent draw, but also one of the lower profile machines. It would be very easy to move, and could be bought for next to nothing.

The other choice is the one I have my eye on. The Cedar Creek Mine ride is an ancient Arrow mine train. It's the second oldest coaster in the park (1969), probably one of the least popular, and it's in an area of the park that has long been rumored to be the home of the next super contraption. Not too long ago I saw some recent online photos of Mine Rides track and terrain. The pictures weren't of the ride itself, but rather of various patches of grass in and around the ride that were spray painted orange. Mind you that's hardly anything to get excited about, but it does intrigue me when the sale of a Cedar Point coaster comes up.

As for Six Flags, I'm glad to see them finally get a little break from the red ink blues. Maybe they really are slowly turning things around, but not so big positive numbers in one quarter aren't real convincing indicators to me. Cedar Fair numbers are pretty stagnant right now, but they aren't really down, and they are still in a whole lot better shape and position than Six Flags. We heard Great Adventure's plans recently, and an announcement from Cedar Point is probably not too far away.

From Kevin Baxter on August 11, 2005 at 10:31 PM
Of course, we must ignore all the other great things that have happened under Iger too to make him seem so great, like...

The film division SUCKING for the second straight year.

The home video division FLOPPING AROUND LIKE A DEAD FISH.

Disneyland is roaring along, but the other parks are all basically FLAT from last year, and DCA is way down.

Disney FIXING California Screamin' without Intamin's approval, causing YET ANOTHER CRASH.

Disney is COMPLETELY AND TOTALLY MISHANDLING the Muppets. So badly that the only hope for them is The Muppet Show: Season One selling millions of copies.

ABC returning many low-performing shows to the fall schedule, instead relying on their few new hits - which are FLAMING OUT in reruns - to survive a sophomore slump.

The court case for the fatal Big Thunder accident has yet to appear. They WON'T WIN that one.

Iger gets about a 60% so far, which is about 30 points higher than Eisner would get, so at least there's that. Let's not anoint him yet.


That said, I have a little problem with the whole court case. It seems like the whole focus was on the fact that Ovitz was hired in the first place. If that was the case, then the plaintiffs presented a pitiful case. It never should have been about his tenure at Disney; it should have been solely about his golden parachute, which everyone knows was way too much. Companies will make mistakes, and the shareholders shouldn't be able to sue them for every one of them, but companies should ALWAYS be liable for these ridiculous golden parachutes, especially if they aren't approved by the board, as this one wasn't.

From J. Dana on August 11, 2005 at 11:00 PM
Kevin, one point of disagreement: I'm seeing the Muppets EVERYWHERE...heck, they even showed up at the Xgames on ESPN...Disney has placed these lovable hand warmers everywhere...and the Muppet's Oz on tv was a moderate success (not huge). And I've heard that a full slate is coming....and releasing the Muppet Show on DVD is just MORE marketing might (and revenue boost)...Disney is taking the George Lucas/Star Wars example: Prior to the 1999 release of Phantom Menace, Lucas created an ENORMOUS buzz with his re-released Star Wars movies on video (I got them), then the new editions in theaters, plus all the Star Wars video games...the buzz was deafening by the time Phantom Menace shot out of the gate...it appears that Disney is gradually building our awareness back to the Muppets, placing them casually here and there, releasing the Muppet Show season one, doing the Oz movie...and planning for a complete refurbishment of the theme park attractions, not to mention new attractions being designed as we speak...

I think the Muppets will come ROARING back pretty soon...

From J. Dana on August 11, 2005 at 11:00 PM
Kevin, one point of disagreement: I'm seeing the Muppets EVERYWHERE...heck, they even showed up at the Xgames on ESPN...Disney has placed these lovable hand warmers everywhere...and the Muppet's Oz on tv was a moderate success (not huge). And I've heard that a full slate is coming....and releasing the Muppet Show on DVD is just MORE marketing might (and revenue boost)...Disney is taking the George Lucas/Star Wars example: Prior to the 1999 release of Phantom Menace, Lucas created an ENORMOUS buzz with his re-released Star Wars movies on video (I got them), then the new editions in theaters, plus all the Star Wars video games...the buzz was deafening by the time Phantom Menace shot out of the gate...it appears that Disney is gradually building our awareness back to the Muppets, placing them casually here and there, releasing the Muppet Show season one, doing the Oz movie...and planning for a complete refurbishment of the theme park attractions, not to mention new attractions being designed as we speak...

I think the Muppets will come ROARING back pretty soon...

From J. Dana on August 11, 2005 at 11:06 PM
From TH Creative on August 12, 2005 at 6:00 AM
I think Mr. Baxter’s opinions and predictions are quite reasonable and may well be accurate. And I am pleased to see that none of them directly contradict any of the items listed in my post.

Bravo, sir!

From Kevin Baxter on August 13, 2005 at 6:45 PM
They weren't meant to contradict your points, but to add some reality to the rosiness you only seem to focus on. Which I don't think does anybody any good. I think the general consensus is that Iger could IN NO WAY be worse than Eisner. But he's certainly not the anti-Eisner yet, especially with ABC's fall season approaching, which Iger's fingerprints are all over.

As for the Muppets, no one would like to see them become relevant again more than I would - did I preorder the Season One DVD? Duh! - but that Oz thing no way compares to the Muppets of old, not that much of the more recent Muppet stuff, like that horrid Jessica Simpson special or that Treasure Island thing or that Gonzo movie, is much better. And I don't think putting them EVERYWHERE - though I certainly haven't seen them, except in this week's EW - creates buzz for anything if the creativity isn't there. Certainly the Jim Henson-free Jim Henson company hasn't done its job, but I don't think Disney, one of the most creatively bankrupt companies out there, can help them GET buzzworthy projects. They need to bring people with a Muppet sensibility INTO the company and then let them do their jobs.

From TH Creative on August 15, 2005 at 5:41 AM
Mr. Baxter writes: "They weren't meant to contradict your points..."

I Respond: I know! And I think it's GREAT!


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