THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Tuesday, November 8, 1994 TAG: 9411030012
SECTION: FRONT PAGE: A14 EDITION: FINAL
TYPE: ANOTHER VIEW
SOURCE: By DAVID F. SCOTT JR.
LENGTH: Medium: 83 lines
Florida should be rejoicing at the news that decision-makers from The Walt Disney Co. altered plans to construct a history-oriented theme park in northern Virginia. It is also likely that investors in Disney common stock either are cheering the decision or should be cheering. The logic here is straightforward.
Florida is enduring a dearth of tourists. The setting aside of Disney's Virginia removes a potential competitor for tourist-generated dollars from the competitive battlefield. When Missouri becomes a tourist mecca, you know that the world, and its vacation patterns along with it, has dramatically been changed.
Along these same lines, it is totally fathomable that Euro Disney is partially responsible for the easily documented drop-off in foreign visitors passing through Orlando International Airport in 1994. If you have a Disney theme park in California, one outside of Paris and one in Japan, why fly to Orlando to visit another Disney theme park? Increasing the supply of such theme parks outside of Florida reduces the total amount of vacation dollars that will be spent in Florida.
Now let's consider the holders of Disney common stock. These are the residual investors in the firm. Also, in the eyes of the legal system, these folks who hold the common stock are the owners of the firm. This means the officers of the firm are agents of the stockholders who must act in the stockholders' best collective interests. It is entirely possible that Disney stockholders will be better off (wealthier) if Disney's Virginia is never constructed and operated. This line of reasoning follows from two different perspectives.
First, it is an observable fact that several variables in the risk-return model used by Disney to decide whether to invest or not invest in the Euro Disney resort had to either contain highly optimistic estimates, or that the basic financial model was misspecified. Otherwise, the project would not have suffered the well-documented losses that plagued it since opening in April 1992. So investors might reasonably ask: What has changed within the Disney decision-making framework to reduce the likelihood of Disney's Virginia going the way of Euro Disney? As outside investors, we do not know. We have to maintain confidence that management is acting in the shareholders' best interests.
The second wealth-maximizing perspective focuses upon the probabilities that the proposed history theme park will possess enough unique attributes to provide for successful product differentiation from among competing attractions. Here it is prudent to be aware that Colonial Williamsburg, just a short drive south of Washington, D.C., has for decades possessed a virtual monopoly on high-quality history entertainment and education in the same general geographic region as the suggested Disney attraction. It is an existing tourist attraction of the first rank.
Colonial Williamsburg is an exquisite piece of work and restoration that edges up to the College of William and Mary. Global political types continually conduct business within this location and are often entertained here by U.S. presidential administrations. They are typically housed at the stately Williamsburg Inn. Inter-country agreements have been signed within this living attraction. So it is at best a flip of the coin as to whether Disney's Virginia can draw sufficient business from Colonial Williamsburg in order to increase the firm's after-tax cash flows and raise stock price.
Finally, there is virtue and profitability in running well any firm's lines of business that are already in place. Superb service within existing product lines can aid a firm in maintaining a vlue-added barrier to entry. A critical part of all financial capital-allocation decisions is to evaluate, in an unemotional manner, the possibility of abandoning an earlier, popular idea. A company can spread itself too thin. Control and service begin to slip. So abandoning Disney's Virginia altogether should be analyzed against some alternative use of the firm's cash flows.
It can be objectively argued that the financial markets might value more highly some disgorging of excess cash flows in the form of higher dividend payments to shareholders, coupled with a new and visible plan on management succession within The Walt Disney Co. MEMO: Mr. Scott, executive director of Dr. Phillips Institute for the Study of
American Business Activity, College of Business Administration,
University of Central Florida in Orlando admits to owning more than one
share of The Walt Disney Co. common stock.
by CNB