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Why Wall Street Is Unhappy (for Now) With Disney’s CEO Change

We all knew the end was coming. Bob Iger had promised, time and again, that the end was coming. But the rather abrupt announcement Tuesday afternoon that he would relinquish his longtime role as CEO of the Walt Disney Co. — and that theme parks head Bob Chapek would succeed him at the top of the Mouse’s big machine, effectively immediately — nevertheless knocked the wind out of everyone in Hollywood and on Wall Street.

Shares tumbled on the news in after-hours trade Tuesday and carried over to Wednesday’s regular session, dragging Disney’s stock down 3.8% and outpacing the broader market’s dip as it attempted to bounce back amid coronavirus fears. (Meanwhile, Netflix shot up 5.3% Wednesday.)

Chapek is a seasoned, well-liked, 27-year Disney veteran. The industry had long known that the end of Iger’s reign was approaching. So what happened?

1. The Timing Was Unexpected — and Possibly Unplanned?

Given that Iger’s contract doesn’t expire until the end of 2021, Barclay’s analyst Kannan Venkateshwar wrote, in a note to clients, that it was “not clear why the company felt the urgency to undertake the transition immediately.” (Notably, Iger will remain on as executive chairman, helming Disney’s overall creative direction, which is where he believes his focus should be full time until the end of his term.)

The succession process was also something of a break from historical precedent, he noted, given that the role of chief operating officer is not infrequently a pit stop for CEO candidates. Iger was COO to then-head Michael Eisner, and Tom Staggs had served as COO to Iger with the expectation that he, too, would ascend. (Staggs exited in 2016 after the board would not commit to a succession decision.)

Venkateshwar also voiced concern that Disney did not name a successor to Chapek in the parks, experiences and products division, “which also seems to imply that the timing of the transition wasn’t planned.”

Whether or not Disney was potentially trying to get ahead of a news leak, Wells Fargo’s Steven Cahall acknowledged that the best time for succession announcements is basically “never,” but “this one is likely to cause particular consternation with investors.”

“We’d say Chapek is well-regarded but this decision was not really telegraphed, so there will likely be lots of questions around “why right now?” and in particular if ‘core’ Disney is looking incrementally risky within the C-suite,” he wrote.

2. Bob Iger Is a Wall Street Darling 

Speaking of the C-suite, Iger “is one of the most beloved and respected CEOs, not just in the media space, but across all public companies,” noted Bernstein analyst Todd Juenger, having anticipated that the market would respond poorly.

“One of our favorite questions to ask investors over the past few years has been: ‘can you name a legitimate candidate for Disney CEO who the market would perceive as an upgrade to Mr. Iger?'” he wrote. “The obvious and unanimous answer being: no.”

Iger leaves massive ($1,000-plus John Lobb) shoes to fill. And the question is “not a condemnation of Mr. Chapek,” said Juenger, simply a reflection of the “almost impossible task” of stepping into such a prominent role.

Then there’s the matter of Iger’s legacy at the company, during which time he acquired Lucasfilm, Pixar, Marvel and 20th Century Fox. The first three buyouts were big bets that have since paid off, and the latter purchase appears to be going well enough.

In that regard, Disney has signaled that it is unlikely to veer off its current course, which in recent years has boasted strong performances from its studios and parks divisions (the latter of which Chapek steered).

Questions have already begun to swirl around what the new CEO will do with Disney’s TV networks, such as ABC and ESPN, but Chapek told Bloomberg TV shortly after the announcement that he intends to “double down on the exact same strategies that Bob [Iger] has established 15 years ago that have served us so well.”

3. People Were Betting on Other Horses

But Chapek was not the obvious choice, at least not from Hollywood’s perspective. The town had largely assumed that the race to succeed Iger was down to Disney direct-to-consumer and international chairman Kevin Mayer and Disney Television chairman and media networks co-chair Peter Rice. (Although that oversight of Chapek may be more a sign of industry tunnel vision than anything else: Juenger notes that Chapek and Mayer were the two leading candidates, indicating that the Street understood that the former was in the running.)

The “majority of investors” that Juenger and fellow Bernstein analysts had spoken with had expected Mayer to ascend, given his role as the architect of the Fox acquisition, his involvement in the Lucasfilm/Marvel/Pixar deals, not to mention Disney Plus’ high-profile splash-landing into the subscription streaming market, which Mayer engineered.

“While Mr. Chapek has worked in multiple Disney segments and has the breadth of experience over two decades to take on the role, the company has made a massive bet on streaming with its ~$70bn Fox acquisition and the launch of Disney Plus,” said Barclays’ Venkateshwar, adding that that pivot had set the succession focus in Mayer’s direction.

Disney Plus is the company’s path to the future, amid an ever-changing landscape that has focused on streaming as its main battleground. Still, though Chapek has no direct experience in content, his bona fides in home entertainment, consumer products and theme parks and resorts have been enough to assure some industry insiders that he will be a capable captain.

Still, Investors Are Likely to Return for Another Trip to Disneyland

Even with the plunge in Disney’s stock Wednesday, many in the financial community have already embraced the change, and believe the aftershocks will wear off.

With another 22 months to go before the end of his deal, Iger would have had to make the announcement at some point, after all, and this long succession plan allows the company — and the industry — to ease into the transition.

Moody’s Investors Service senior VP Neil Begley believes the move to have Chapek focus on day-to-day operations and Iger focus on the creative side is a “win-win.” He believes the new leadership structure will not result in changes to Disney’s strategic direction or financial policy, “including the commitment to deleveraging following the 21st Century Fox acquisition.”

Wells Fargo’s Cahall thinks the “knee-jerk negative reaction” will pass, before investors shift their focus to other things. Besides, Chapek has been in charge of Disney’s parks and resorts, long a solid performing division.

“While Iger is and was a superstar, we believe Chapek is set up well to succeed,” he wrote. “Disney’s assets are the best in the biz and we think that statement holds true regardless of who is at the helm. Chapek is a good executor per Parks massive earnings growth so we remain bullish on the outlook despite the near-term sentiment headwinds.”

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