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Ovitz payday may climb

A debate seems to be brewing over Michael Ovitz’s last Disney payday. Although no definitive figure is yet available on Ovitz’s compensation package, a preliminary examination of public documents suggests his ultimate payday may be even higher than many published reports suggest.

If, as is understood, Ovitz walked away with 3 million stock options and a cash payment of about $50 million, he has a package that could be worth easily $250 million in five years. But Ovitz’s contract, on file with the SEC, makes clear he is only to get such generous exit provisions under specified circumstances.

His deal, signed in October 1995, says he will get to keep 3 million of his 5 million stock options for up to five years and get a cash payment worth roughly $50 million under circumstances described as a “non-fault termination.” This only applies, however, if Ovitz is not retained as president, is assigned duties “which are materially inconsistent with his position as president” or does not receive any payments he is owed.

Vague language

It is not clear that any of these circumstances apply in the current situation, although the wording is vague enough that Disney could have negotiated the exit to fit the contract. The contract also says Disney needs shareholder approval to allow the options to be held for five years after Ovitz’s departure. It’s not clear whether Disney has sought such approval and Disney spokesmen were not available for comment Friday.

All of this begs the question of why Disney would have been so keen to award Ovitz such a generous deal for only a year’s work. One possible explanation is that Eisner felt some guilt that the appointment of his friend did not work out. At the same time, both were probably strongly motivated to avoid an acrimonious dispute.

The ultimate worth of the package depends on Disney’s future stock performance. The 3 million options can be exercised at $56.87 a share – Disney’s stock price on the day the deal was struck – making them worth about $45 million today. But there is no reason to assume Ovitz would either exercise the options or sell the underlying stock today. He has until 2002 to exercise the options, and by then Disney stock is likely to be trading much higher.

Stock on the rise

Indeed, in the past three years, Disney stock has risen about 70% and it is likely to keep rising at that rate over the next few years. Disney’s profit grows 17% to 18% a year, says Schroder Wertheim analyst David Londoner, who added, “I don’t see why the stock shouldn’t track along with the earnings.”

That means the stock could be trading higher than $120 a share in five years’ time, which implies a potential profit for Ovitz of $189 million. Of course, inflation eats at the value of that profit somewhat and valuations of the options also take into account the uncertainty of future stock price movements. Nevertheless, analysts say the options are likely to be worth more than the amount implied by today’s market.

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