EASY AS ABC

By NANCY GIBBS

On that sweet, dry July night in Manhattan, after his board approved creation of the biggest entertainment company in the world, Disney chairman Michael Eisner had dinner with his mom. Margaret Dammann Eisner has often been described as a world-class competitive woman, which suggests that her son's triumph last week owes something to genes. When young Michael was growing up in a Park Avenue apartment, his parents borrowed a Picasso from an art-dealer friend to hang in Michael's room. It was called Bullfight. The man who would come to influence, perhaps more than anyone else alive, what Americans see at the movie theater or in their homes, was allowed to watch one hour of television a day--after he had read for two hours.

When dinner was over, Eisner went to the law firm Dewey Ballantine to iron out the final niceties of Disney's $19 billion deal to buy Capital Cities/ABC. And next morning, when he and Cap Cities chairman Thomas Murphy arrived on Good Morning America to stun the world with news of their merger, it was tempting to view Eisner's triumph as the kind of danouement usually reserved for the last 10 minutes of a Disney movie. Wall Street whooped at the deal, which united Disney's theme parks and movie and television studios with ABC's gold-plated network and cable channels, like ESPN. The new power couple becomes the latest media company to embrace all the paraphernalia of the information age: movies, television, cable channels and, thanks to Disney's alliance with regional phone companies, telephones. Through a classic form of vertical integration, Disney can now feed its patented family fare to a vastly larger audience around the world. "This," sighed Christopher Dixon, an analyst at PaineWebber, "is a marriage made in heaven."

A day later, another deal, the one that everyone had long expected, was finally announced: Westinghouse offered $5.4 billion to buy CBS. And even as two of the three major networks changed hands within 48 hours, the House passed a bill scrapping the regulations that have governed the industry for the past six decades. "The landscape for the entertainment industry is completely different now," says John Turo, an analyst with Rodman & Renshaw, a Chicago-based brokerage firm. "From here on we should expect to see continued consolidation within the industry, a consolidation that will move along at a crushing speed."

A merger this size usually comes wrapped in explanations about cash flow and synergy and the global marketplace. But for all the theories, even deals this logical depend for their fuel on the dreams and grudges and high octane of a very few, very powerful men who are too rich to be doing it for the money and too vain to admit to motives more complex than the desire to serve their shareholders. And so last week, following the second biggest takeover of all time, there was a story to tell about the ever more ferocious fight among media giants trying to wire the world and in particular about a talented man with a lot of enemies who, after undergoing a string of private tragedies and public humiliations, had something to prove.

Michael Eisner had endured a wrenching year, in which he grieved the loss of his trusted colleague, Disney president Frank Wells, then began reading his own professional obituaries as he lay in a hospital recovering from heart surgery, and then read his company's obituaries--with headlines like CLOUDS OVER DISNEYLAND. Indeed, Wall Street analysts and rubbernecking Hollywood types watched with morbid glee the departure of one top Disney brain after another, to be replaced by men derided as Eisner's bean counters. The fact that in 1994 his company produced the year's top movie, The Lion King; the top-rated TV show, Home Improvement; and the hit Broadway musical Beauty and the Beast did not prevent industry prophets from warning that, with the forced exile of his boy-genius studio chief, Jeffrey Katzenberg, Eisner's kingdom was losing the magic.

What made last week's deal so savory for Eisner was the chance it provided to silence the Furies. Eisner is a deeply competitive man, routinely described as one of the most ruthlessly ambitious in a town not known for the modesty of its moguls. In one grand gesture he erased much of the conventional wisdom about his style and vision: the heart surgery that was supposed to have mellowed him turns out to have made him even tougher; the egomaniac who was accused of driving away anyone talented enough to threaten his regime embraces Cap Cities' formidable president, Robert Iger, and his team; the tightwad who would never buy retail or take the big gamble for fear of making the big mistake goes and seals the deal of the year. "It took last year for it to be revealed that he wasn't warm and fuzzy," says a Disney executive. "But so what? Who cares about that when the stock is at 60? Warm and fuzzy is nice if you're slippers, but Michael is too smart and ruthless to care if he's liked."

Wall Street whistled while it worked, gobbling up shares of both companies, and by the end of the week, their combined value topped $48 billion. Grumpy analysts who had hounded Eisner for his caution and his lack of global vision were now swooning about so neat a fit between "content" and "distribution." From Eisner's enemies came praise through clenched teeth; it would be hard to avoid doing business with the man now that he presided over so vast an empire. "If you had asked me Sunday night as I went to bed, 'Is Eisner paying $19 billion for ABC?'" Katzenberg said, "I would have said to you, 'Get your head examined.' That's how much I know."

It makes for such a happy ending that for a while at least it will distract the audience from thinking about the sequel. Will Eisner be able to fuse the established leadership of Cap Cities/ABC with his Disney team, whose major players have been in their jobs less than a year? After he creates his chain of ESPN sports bars, just how much synergy will he really be able to bring about? After all, Disney already produces programs for ABC. Will Eisner be tempted to force-feed Disney fare to the network and lock out better shows? As with past media megamergers, this one inspired howls about how "synergy turns out to be just another word for monopoly,'' in the words of Rutgers professor Benjamin Barber, writing in the New York Times. Disney's record of Cloroxing reality until it squeaks made some journalists uneasy with the union, triggering alarms about creeping infotainment and mordant speculation about what Ted Koppel might look like wearing Mickey Mouse ears.

Certainly the hearts of parents across the country leaped at the prospect of Saturday-morning television being turned over to the company that gave them 101 Dalmatians and Aladdin. But for Eisner, the Disney-ABC repertoire will play on a much bigger stage. The company, for instance, can now take programs developed for the Disney Channel, showcase them on ABC, and then export them overseas as part of a package with the network's immensely popular sports programming delivered on ESPN--international marketing and sports both being prime items on Eisner's agenda.

The way Eisner spins it, the deal with ABC had its origins about 40 years ago, when Walt Disney dreamed of building a great theme park and needed to raise money, having already mortgaged his house and bet his life insurance. He tried NBC and CBS. They said no. ABC, however, offered $500,000 and $4.5 million in loan guarantees. The two companies have sustained a casual romance ever since. ABC seized the chance to broadcast Disney's first three television series; Eisner spent 10 years at the network, starting with children's programming and ending up as a senior vice president in charge of prime time. He says he talked merger a decade ago, after he joined Disney. "It was discussed three years ago and two years ago and six months ago," he says. "Finally we just felt the time was right for both companies."

Deals like this don't happen by accident, but there was a weirdly spontaneous feeling to the way the whole thing unfolded. The mating dances, the number crunching, the legal maneuvering were already well under way. Each side knew the other company intimately. All that was left was for a couple of guys to bump into each other in an Idaho parking lot and decide to start playing Monopoly with real money.

Of course, these weren't just any guys. Along with Eisner and Murphy, there was Warren Buffett, one of the greatest investors of all time, with a genius for lubricating egos and for being in the right place at the right time. Given Eisner's personality, says an executive close to the deal, Buffett's role was key. "He could deal with parts of Eisner that Murphy couldn't tolerate," he says. And it wasn't just any parking lot. It was at a Sun Valley, Idaho, resort last month, where investment banker Herb Allen annually gathers the Men Who Own the Media and other titans of industry to play golf and go river rafting and rearrange the planets.

Eisner was getting ready to leave when he ran into Buffett, exchanged some pleasantries and then popped the question. "Do you think ABC is still for sale?" he asked Buffett, who ought to know, since he owns 13% of the company. As it happened, Buffett was on his way to meet ABC chairman Tom Murphy for a friendly game of golf. Just to keep things interesting, the foursome would be rounded out by the richest man in America, Microsoft chairman Bill Gates, and Gates' wife. By the end of the day, Murphy had lost $2 to Buffett and $3 to Gates, and he had agreed to call Eisner the next week to plan the wedding.

There were many reasons why the time was right. Murphy wanted to get out of day-to-day management of the company, yet somehow leave in triumph. Eisner, meanwhile, who was once happy to focus on creating content and leave its delivery to others, had found that the rules have changed. Deregulation will permit networks to syndicate their own shows; a smart way for a studio to guarantee its access to the airwaves would be to own the network.

The timing was financially right as well. Both Disney and Capital Cities/ABC ran up record profits last year. A strong economy, low interest rates and solid cash flows at both companies will, according to Hollywood insiders, wipe away the $10 billion debt within four years, particularly since Eisner has told associates this is a big priority.

As it turned out, the negotiations produced only one hitch: Eisner wanted the deal to be all cash; Murphy wanted Disney stock. A compromise was hammered out in late July in which they split the difference. Eisner agreed to exchange each Cap Cities share for one share in Disney plus $65 in cash. For the next several days, employees of both companies--but fewer than two dozen people--worked out the final details in deep secrecy. That they managed to keep the deal quiet was testimony to the discretion of the negotiators, the distractions of summer and the absence of large, leaky teams of expensive lawyers and investment bankers. Eisner knew the secret was safe the Friday before the deal was announced. "I could tell that nobody knew about it," he says, "when Capital Cities stock went down."

Throughout his tenure as chairman, Eisner has placed himself visibly in front of every success, playing host to The Magical World of Disney on ABC, just as Walt did 30 years before. With celebrity came money: Eisner is said to have earned nearly half a billion dollars since he joined Disney in 1984, thanks in part to the value of the stock options he holds. In 1993 alone, he cashed in options worth more than $200 million.

When Eisner's heart began to fail last summer, anxious colleagues wondered whether he would walk away from the pressures of the job. But far from making him sit back, bask in his wealth and take it easy, the illness seemed to make him eat better and punch harder. He exercised regularly, lost 15 lbs. and showed no more inclination to name a successor than he had after his associate Wells' death. "When you have a brush with death, you can approach it two ways," notes a Disney executive. "You can either sail to Capri and take it easy, or you can work harder to make sure that you're not replaceable. Psychologically, you don't want to say to yourself, 'If I die, things will be fine.' [Eisner] got terrified. He thought Katzenberg wanted his job. And he was concerned that he would not leave the legacy he wanted."

Katzenberg had approached Eisner even before Wells' death, suggesting that he was due for a promotion. When Eisner made it clear that he had no intention of handing Katzenberg the crown, the showdown that followed left Hollywood gasping at the sight of the prince being publicly beheaded. Katzenberg had plenty of detractors; he was a nudge, legendarily hardworking and hard to please; his record was far more mixed on live-action films than on animated features, and he lacked a feel for theme parks. But he was viewed as one of the brightest minds in the game. While the board was no more eager than Eisner to meet Katzenberg's demands, his departure, followed seven months later by that of TV chief Richard Frank, spread the notion that the company was in turmoil.

As the fairy dust flaked off the corporate image, other setbacks seemed more foreboding. Euro Disney, constructed outside Paris at a cost of $4.5 billion, at one point was reportedly losing $1 million a day. (It posted its first profit in the second quarter of this year.) Having fought to build "Disney's America" near the Civil War battlefields of Manassas, Virginia, Eisner came under attack from literati who portrayed him as the source of all that was venal and kitschy in American life. Unwilling to pay top dollar for an established record company, Disney hired music lawyer Peter Paterno to help launch its Hollywood Records; in six years, the label has yet to produce a hit. Paterno did cause a stir when he reportedly featured a dozen bare-breasted women on bicycles at a press event in London. Finally in 1993, when Paterno sent out marijuana water pipes to radio stations as a promotion, Eisner had to pull the plug. Eisner claims Hollywood has lost Disney only about $10 million; insiders put the figure closer to $70 million.

So here was the man who, as FORTUNE magazine concluded in April, had "the best job in the world," coming under fire for being at once grandiose and myopic. Having scooped up ABC and left his critics breathless, Eisner can now sit back and relish the vindication. "I like the fact that we're successful," he says. "I like the fact I'm not in the hospital. I like the fact that people are writing nicely about this, generally. I think we did the right thing."

And then there were the private pleasures of being able to settle some old scores. A particularly personal and high-stakes confrontation posed itself with Katzenberg, whose new DreamWorks SKG--in which he is a partner with Steven Spielberg and David Geffen--had just signed a $200 million joint venture to make shows with ABC. Though Katzenberg's loathing of Eisner is a matter of public record, he professes devotion to Cap Cities' Iger. "We're neither insecure nor paranoid about the shifts that are going on," said Katzenberg last week. "The fact is, with any of these people that own and run the networks, if you can deliver the next Friends or ER, they'll buy it from Attila the Hun."

While others fretted about their position in the new media universe, Eisner quietly made more money for himself. By Friday, the value of his Disney shares had risen $16 million. All in all, not a bad week for a man whose father, according to one longtime Eisner associate, used to say young Michael would never amount to much.

--Reported by Bernard Baumohl/New York and Jeffrey Ressner/Los Angeles

With reporting by BERNARD BAUMOHL/NEW YORK AND JEFFREY RESSNER/LOS ANGELES