Iger & Zaz in the Deal Flow

Welcome back to Dry Powder. I’m Bill Cohan.

One of the pleasures of working at Puck is being able to tap any one of my talented partners to exchange notes on the stories that fascinate us most. This week, Dylan Byers and I worked together to break the news that WBD leadership is starting to discuss the logistics of a CNN sale (you can find that story here), while Matt Belloni and I chatted about the various headaches making Bob Iger’s second stint at Disney less than magical, which you can find below. (I also spoke with the actor-turned-author Ben McKenzie about his strange and foreboding 2022 interview with Sam Bankman-Fried.) But first…

The Big Law Gold Rush

There was an eye-opening piece in The Wall Street Journal this week, about how rainmaking Wall Street lawyers now often make more than the dealmakers they advise. At the heart of the story was Rob Kindler, who exited Morgan Stanley earlier this month to join the white-shoe law firm Paul Weiss, where, according to the Journal, he stands to make upwards of $10 million annually. (Nice going, Rob.) I used to work for Rob, shortly after he made the switch to banking after years as a Cravath partner, in 2000, and was dispensing expert legal advice on M&A deals to what is now JPMorgan Chase—it was Chase Securities back then—as a managing director. While it’s true that Rob did not know that much about valuation, or more particularly, how to value a company and present that information to a client in a confident, convincing way, he was—and remains—a master M&A tactician, especially when it comes to legal specifics.I still remember 23 years ago, during the spring and summer of 2000, when a group of us Chase bankers were working with Comcast on what became its successful, blockbuster $72 billion acquisition of AT&T’s cable business, known as AT&T Broadband. There were other bankers besides us working with Comcast, including Paul Taubman, now at PJT Partners, and Steve Rattner, a longtime advisor to Brian Roberts and my onetime boss at Lazard. But it was Rob who came up with one of the most important breakthrough insights that not only electrified Roberts, but also probably made all the difference in Comcast getting its prize. It’s worth remembering that, at the time, AT&T Broadband was not for sale. It wasn’t necessarily a core part of AT&T’s business, but that didn’t mean it was for sale, either. It was a division, or a subsidiary, of AT&T, and without it being for sale, there really wasn’t much Comcast could do to get AT&T to sell it to them. It’s not like Comcast could launch a hostile deal for AT&T Broadband, at least in the traditional sense, since AT&T Broadband was not a separately traded company, with its own stock that could be scooped up in the market. Obviously, Comcast could offer to pay a lot for AT&T Broadband, and it was willing to do so—at the time, Comcast’s $72 billion price was the largest M&A deal of all time. But how could Comcast get Michael Armstrong, the C.E.O. of AT&T at the time, to feel pressure to sell AT&T Broadband to Roberts? That was a much-debated topic in Philadelphia. Rob came up with the answer: Make the offer public, and make it around the AT&T annual shareholder meeting in the spring of 2001 (things were simpler back then). It was a great idea and insight, and it made all the difference. So that’s what Roberts decided to do: He made Armstrong an offer he simply couldn’t refuse, especially when AT&T shareholders were made aware of it. After that, the rest of the deal was paperwork and endless valuations, including a presentation at the offices of Davis Polk, near Grand Central, on the morning of September 11, 2001. All of which is to say, M&A lawyers can make the jump to banking and be effective. I still speak to Rob, of course, and while I don’t think he made the jump back to the legal profession for the money—he’s made plenty of money between Cravath, JPMorgan Chase, and Morgan Stanley—I think he returned to Paul Weiss, as he approaches the ripe old age of 70 and after 17 years at Morgan Stanley, because he wanted to feel relevant again. These days, investment banking at the big Wall Street firms is increasingly a young person’s sport. But at Paul Weiss, or at Big Law generally, age and wisdom are still appreciated. At Paul Weiss, Rob will probably make as much money as he needs at this point. But he will also be able to get back in the flow, and dispense his wisdom, as needed. Earlier this year, I wrote about the fact that some lawyers are making more money than bankers these days, and that investment banking no longer pays as much as it used to. I referenced this fact again in a piece from March where I reported that law firms, like the old investment banking partnerships of years past, are starting to think about the possibility of taking their firms public. After all, like Goldman and Morgan Stanley and others, Big Law firms are immensely profitable partnerships that pay out their growing profits mostly to their partners, with slices going to the associates. In a S-1, these law firm income statements would probably look pretty darn attractive, it’s true. And of course, what law firm partners wouldn’t want to cash out their ownership percentage in an I.P.O.? That’s what the Morgan Stanley partners did in 1985, what the Goldman partners did in 1999, and the Lazard partners did in 2005. It’s a once-in-a-lifetime hit that few, in banking at least, could ultimately resist. So far, except in the UK, law firms in the U.S. have resisted the urge. As I pointed out in March, that could be changing, and soon. But a word of caution. Public companies have an obligation to public shareholders. And that can be a hard adjustment for what were once private partnerships that only had to be concerned about what a handful of difficult partners wanted to be paid, among other concerns. So problems crop up. For instance, Lazard has been a public company for 18 years. But it still pays people as if it were still a private partnership or nearly so. Some 76 percent of its revenue is paid out in the form of compensation to its bankers, or was in the first quarter of this year anyway. That’s not very shareholder-friendly. And the stock price reflects that fact: In the last five years, the Lazard stock is down more than 37 percent. Meanwhile, at Goldman, the opposite seems to be happening. David Solomon has been running the firm in a relatively shareholder-friendly way—its failed consumer banking thrust aside—and pays its bankers and traders a much lower percentage of revenue, around 35 percent or so. As has been discussed in Dry Powder for months now, and that others in the media are starting to focus on too, that has led to a lot of griping among the Goldman partners and among the rank-and-file. And that griping may end up costing Solomon his job. (One Goldman partner put the percentage to me recently at 55-45 that Solomon is gone by the end of 2023, essentially even odds.) So, you know, going public may seem like a bonanza to the partners that benefit at the time of the I.P.O.. But it can create big problems down the line, especially in a business where the assets go up and down the elevator every day. Now, onto my conversation with Matt…

The Iger Sophomore Slump

Succession planning, ESPN, Hulu, the Walden question, and a CFO search: Iger’s second act isn’t what he planned, so what’s the way out? Two Disney-watchers debate.

WILLIAM D. COHAN

MATTHEW BELLONI

A candid conversation concerning the latest headaches at Disney in the second Iger era, with Hollywood insider Matt Belloni.

Matt Belloni: Hi Bill, it’s been awhile. It’s certainly been a loooong few months for Bob Iger in his return stint as Disney C.E.O. He’s laid off about 7,000 employees; pledged to slash costs by $5 billion; fended off investor Nelson Peltz and his disgruntled mini-me Ike Perlmutter; sued the governor of Florida; watched as the cable bundle that propped him up in his first C.E.O. tenure now drags him down; distanced himself from Hulu and then apparently re-committed himself to spending billions to take the platform out from Comcast; Pixar and Disney Animation can’t buy themselves a hit (and at $200 million a pop for these movies, they’re definitely trying). Oh, and his screenwriters are on strike. The Disney stock is flat for the year, and lower than when this supposed “savior” returned in November. When you look at the Disney balance sheet, what worries you most? William Cohan: There’s no question Iger has his hands full with an increasingly complex business model. He’s got problems nearly everywhere (except ironically from the parks, the business his successor/predecessor ran), including a streaming business losing billions of dollars, movie franchises that seem tired, an ESPN linear channel losing subscribers while also having to pay insane fees for content. Sheesh! And it didn’t help that Elemental just flopped and the once mega-successful Pixar unit appears to be floundering, as you recently noted. Then there is the sideways stock price. But my biggest worry for our friend Mr. Iger is whether he will actually be able to find a successor, as he promised he would, during the rapidly shrinking two-year tenure of his round trip to that 6th floor office in Burbank. Matt: OK, let’s go there first. Bill: Not only do I not see any obvious candidates out there to succeed Iger—it ain’t going to be NBA Commissioner Adam Silver, that’s for sure—I don’t yet believe Iger is actually serious about stepping away. In other words, I wouldn’t be the least bit surprised to see Iger extend his Disney runway for another few years. After all, he remains a vigorous 72-year-old without any clear successor lined up. I’m thinking he’s in Jamie Dimon mode at JPMorgan Chase: a highly respected C.E.O., with political aspirations, who is not ready or willing to give up the seat and has been skilful in eliminating replacements. What do you think, Matt? Matt: At this point, it would be a shock to see Iger just peace-out at the end of 2024. I think he’ll make a move, like elevate his TV chief Dana Walden or parks guy Josh D’Amaro (both of whom he’s taking to Sun Valley for the first time) or bring back his former C.F.O. Tom Staggs (if Staggs’ hurt feelings or commitment to other endeavors would allow it), or identify another heir apparent, and then announce a transition period into 2025 or 2026, where Iger stays but he’s committed to one of these heirs. Then maybe he becomes a hands-on executive chairman, or a co-C.E.O., or the chosen person is paired with a co-C.E.O. to compliment their skills. Something like that. Bill: Oh no, Matt, not a co-C.E.O. situation. That never works out. Don’t see that happening Matt: That does seem unlikely, but not a lot of great options here. Iger also just lost his longtime C.F.O. Christine McCarthy, though most people seem to think she was pushed. Some think Iger’s pick to replace her might become a C.E.O. successor frontrunner. How much are you reading into the McCarthy exit and the fallout? Bill: Disney has done a masterful job of P.R. on this one. On the one hand, McCarthy’s husband is unwell and she has had her own health problems and has been around the Disney C-suite for a long time. On the other hand, it sounds like there was real friction between the top executives and, as we know, Iger is not shy about defenestrating a C.F.O. It might also be a way for him to put into the job someone who could take over. That’s, of course, not the Disney way. There has never been a C.F.O. at the company who became C.E.O., at least not in the past four decades when Disney has had actual C.F.O.s. But finding a superstar C.F.O. who people might think could ascend—think Mike Cavanagh at Comcast—would go a long way to solving Disney’s main problem of who the heck is going to lead the company for the longer term. Matt: I re-read a big chunk of Disney War earlier this year, when I was reviewing James B. Stewart and Rachel Abrams’ Sumner Redstone book for The Washington Post. People forget how susceptible Disney was to various takeovers, hostile and otherwise, over the years. I don’t want to discuss that persistent Apple buyout rumor, which I don’t think would ever make it past regulators. But in your estimation, what would need to happen for Disney to be truly in play? Bill: Disney is a public company, without dual-class stock, and is widely held. There is no concentrated ownership. So all it would take to “put Disney in play” is for a company with the wherewithal to make an offer, either publicly or privately, to buy it. Twitter was not for sale before Elon Musk made public his $44 billion hostile offer for the company. In the end, as was easily predictable, the Twitter board had no choice but to accept Elon’s very generous offer, since absent it, the Twitter stock would have fallen precipitously. Matt: And now they look like geniuses for getting out! Bill: Elon’s deal for Twitter is one of the worst in Wall Street history from a value destruction point of view, but it was one of the best deals in Wall Street history from the Twitter shareholders’ perspective. The same thing could certainly happen at Disney if there were a buyer out there with the mindset to try to pull it off. Disney’s market value is now around $160 billion. Let’s say a bid of $200 billion—a 25 percent premium—gets the deal done, or puts enough pressure on the Disney board to sell. Matt: Back in 2004, when Comcast C.E.O. Brian Roberts launched a hostile bid for Disney at $54 billion (plus $12 billion in debt), that was a 10 percent premium. The Disney board said no, investors quickly bid up the stock beyond that offer, and Roberts eventually backed away with his tail between his legs. The question now is who can afford a $200 billion acquisition, which would easily become the largest M&A deal in history? Bill: The usual suspects, of course: Apple (market value: nearly $3 trillion, incredibly); Amazon ($1.3 trillion); Microsoft ($2.5 trillion); Alphabet ($1.5 trillion) and Meta (back up to $715 billion). Not sure I see any of them pulling the trigger, especially going hostile, but any certainly could. On the other hand, if Iger and the Disney board decided to put the company up for sale—there being no successor or viewing the company’s myriad problems as too intractable to solve—then I would think every one of these five companies would take a serious look, as might a few foreign entities. Regulatory approval would certainly be an issue, unless the stock price continues to slowly set into the west, as it seems to be doing month after month. Matt: Right, so at what point would Iger and the board need to sell Disney to save it? Bill: When they think Disney would somehow be better off as part of Apple or the others. But I would say this is a very low probability scenario, and probably not one that Iger will allow himself to consider. That would forever tarnish his legacy and brand him as The Man Who Sold Disney, which, other than being a good title for an eight-episode limited series, is not something to aspire to achieve. Matt: I agree there. Things would have to get really bad. Or maybe Ron DeSantis kicks Disney out of Florida. Another topic: Iger’s comments, and everyone I’ve talked to, suggest he’s going to buy out Comcast’s share of Hulu in early 2024, which will run Disney at least $9 billion, and possibly a lot more, depending on the valuation. Disney can afford to take that financial hit, but the company is already pretty leveraged. You’ve been a proponent of creative dealmaking here between Disney and Comcast. How should they handle Hulu? Bill: Bob, please don’t just buy Hulu for $9 billion! (Or whatever you and Brian are able to negotiate.) My preference by far would be for Disney to swap ESPN for Comcast’s stake in Hulu, plus whatever cash from Comcast is needed to equalize the valuations of one-third of Hulu and the 80 percent of ESPN that Disney owns. This deal would make Iger look smart, would get Disney the rest of Hulu, plus a bunch of cash to use to pay down debt and invest in streaming, and offload the headache of ESPN to Comcast, which would probably be in a better position to manage the decline and the higher cost of live sports. It strikes me that Disney is running out of gas on ESPN and no longer has answers for it. I don’t see them getting much value by separating ESPN into its own entity. Roberts and Cavanagh would bring fresh energy and ideas to the franchise and figure out its streaming future. Matt: I don’t know. Just as you said Iger doesn’t want to be known as the guy who sold Disney, I don’t think he wants to be the guy who got Disney out of the sports business. Sports is proving to be the most powerful content in the world—in the U.S., sports accounted for 94 of the 100 most-watched telecasts last year—and if Disney wants to continue for the next 50 years as the biggest entertainment company in the world, it kinda needs to be in the sports media business. Bill: I don’t know about that, Matt. The economics of sports no longer work. The cord cutters are everywhere. The cost of the rights to broadcast live sports are rising exponentially, rendering the ESPN income statement highly unattractive. I think Iger is smart enough to see that he’s got nothing left in the tank on ESPN. This is the moment to recognize the swap opportunity. Remember Matt, pride goeth before the fall.

FOUR STORIES WE’RE TALKING ABOUT

The Row’s Future

Is the ultimate quiet luxury brand in expansion mode?

LAUREN SHERMAN

MAGA Mudslinging

On the M.T.G.-Boebert beef and Tucker’s legal muscle.

TINA NGUEYN

De Niro’s Feud

Inside a $6M suit with his assistant.

ERIQ GARDNER

Bret Hot American Summer

Is Baier the stable hand Fox News needs?

DYLAN BYERS

Need help? Review our FAQs page or contact us for assistance. For brand partnerships, email ads@puck.news.

You received this email because you signed up to receive emails from Puck, or as part of your Puck account associated with . To stop receiving this newsletter and/or manage all your email preferences, click here.

Puck is published by Heat Media LLC. 227 W 17th St New York, NY 10011.

SEE THE ARCHIVES