When the Walt Disney Co. and Henson Associates Inc. settled a bitter lawsuit out of court on April 30, conventional wisdom concluded that Henson Associates had humbled the entertainment giant.
Disney, known for driving hard bargains in court, instead apologized to the Henson family for any harm that the "serious misunderstanding" over the failed merger of the two companies had caused.
Wall Street analysts now say, however, that Disney and Henson Associates both probably benefited by calling off the merger.
Disney, the analysts say, will be able to go forward with the last big project planned by Jim Henson: an expensive 3-D movie starring the Muppets at the Disney-MGM Studios Theme Park. It also secured an 18-month license to sell Muppet merchandise at Walt Disney World near Orlando.
Before Jim Henson's death at age 53 in May 1990, a marriage between Disney and Henson Associates seemed made in heaven.
In August 1989, Jim Henson and Michael Eisner announced the merger on ABC's Good Morning America. Jim Henson said that "hooking up with Disney creates . . . a wonderful force."
Henson's role at Disney was to have been broad and diverse. Disney said the famed puppeteer would help produce motion pictures, TV shows, video programs, specials for the Disney Channel and attractions for Disney's theme parks.
But seven months after Jim Henson's death, merger talks broke off. Some analysts believe that Disney wanted to drop its price because the company was not worth as much without Henson.
By April, Henson Associates was hurling charges of fraud at Disney in a trademark and copyright-infringement lawsuit. On April 22, Disney lashed back with its own countersuit, claiming that the five Henson heirs cared more about making money than protecting their father's creative legacy.
A trial date was set, but the dispute was hurriedly patched up. On April 30, the companies announced they had reached an out-of-court settlement, and the suits were dropped.
Disney settled for a licensing agreement that, at first glance, seemed modest. The agreement gives Disney the right to use the Muppet characters in two shows at the Disney-MGM Studios Theme Park for 18 months, with an option to renew for 3 1/2 years.
"Whether Disney got as much as it might've liked may never be known," said Jeffrey Logsdon, senior vice president and analyst at Seidler Amdec, a Los Angeles brokerage. "But it is certain that Disney got what it needed."
What Disney is paying for the deal has never been disclosed, but it seems clear that Disney "didn't have to pay a king's ransom" for the Muppet-licensing rights, said analyst Alan Kassan with Morgan Stanley, the New York brokerage.
From a tax standpoint, it probably made sense for the five heirs to cancel the deal, said Frank Butterfield, senior manager of the tax department at the Atlanta office of KPMG Peat Marwick, an accounting firm.
Had the children sold the company to Disney for $150 million - the original selling price - they would have faced a huge tax bill of tens of millions, Butterfield said.
The heirs would have been required to pay federal income tax on the gain made selling the company at the top federal tax rate of 28 percent, as well as federal estate taxes of 55 percent. Butterfield said those two tax liabilities, when combined, would amount to an effective tax rate of 68 percent.
The Henson heirs will receive income from the agreement.
(Jim Henson's widow, Jane, is not an heir because she gave up her share in Henson Associates several years ago, said Henson Associates spokeswoman Susan Berry. Jane and Jim Henson had been separated for several years when he died, Berry said.)
"By undoing the deal, Henson avoided income taxes they would have had to pay and lowered estate taxes," Butterfield added.
The current agreement with Disney gives the Henson heirs flexibility to find another buyer later, should they desire, analyst Logsdon said.
"The Henson heirs may be thinking, `Gee, maybe we can realize more gain on the sale of the company later.' It probably will behoove them to delay the sale," he added.
The Wall Street Journal, citing unidentified sources, said in April that Henson Associates has explored an acquisition by other big entertainment companies with theme-park interests. Those include MCA Inc., now a unit of Matsushita Electric Industrial Co. of Japan, which owns Universal Studios Florida; and Time Warner Inc., which owns 20 percent of Six Flags Corp.
Jim Henson favored a sale to Walt Disney Co. because he felt that was the best match.
After Jim Henson died, analysts believe that Disney probably tried to pare millions from the $150 million it agreed to pay for Henson Associates.
Without Jim Henson, the company was clearly worth much less than Disney agreed to pay, Morgan Stanley's Kassan said.
"Putting Jim Henson and Michael Eisner together would have meant creative sparks - sort of what you see when (comics) Gene Wilder and Richard Pryor meet," he added. Without Jim Henson, it was probably difficult to put a value on the company.
Disney spokesman Erwin Okun told Variety, the trade magazine, that Disney was willing to pay an additional premium for Henson Associates - up to $50 million more than the agreed-upon price - to compensate the Henson heirs for tax liabilities.
Brian Henson, in earlier interviews with the entertainment trade press, disputed Okun's version of what happened.
He could not be reached for comment, but before the lawsuit was settled, Brian Henson told Variety that Disney decided in December 1990 that it wouldn't buy Henson Associates, "but they wanted to continue to use the Jim Henson name, and they wanted us to give back many millions of dollars on the deal. We couldn't swallow that."