Group #8: Diyar Saltanat Meruyert Dina

1

Case Background

  

1984. Greenmail – Hostile takeover attempt by Steinberg Takeover is unacceptable “Poison Pill” taken by Disney: Arvida Corp. Tender for Disney Stock: $67.50 with Gibson, $72.50 without it Two options for Disney:
 Fight

against takeover in court  Repurchase the stock
2

Profitability Indicators
30%

Gross Profit Margin Operating Profit Margin Net Profit Margin ROE

20%

10%

0% 1979 1980 1981 1982 1983

Steady decline in profitability
3

Liquidity Assessment
Current Ratio
4.50 4.04 3.48 3.00 2.52 1.50 1.11 0.14 1979 1980 1981 1982 1983

-

Liquidity declines at compound rate of 85.45%!
4

Solvency - Leverage
Current Ratio Total Debt/Total Assets
50% 39% 28% 20% 20% 41%

25%

0% 1979 1980 1981 1982 1983

Increasing reliance on debt financing
5

Analysis by Segments
Operating Profit, mln$
200 150 100 50 0 -50
1981 1982 1983

197 129 50 20 -34 134 57

35

48

Entertainment&recreation

Motion pictures

Consumer products

6

What Happens to EPS?
EPS components, $
5.00

4.00

Paid Out as Dividends Reinvested in the Company

3.00

2.00

1.00

-

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

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Stock Price Determination
The Stock Price History Apr.1980 - Feb.2009

©2009 Google. http://www.google.com/finance?q=NYSE%3ADIS

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First option: purchase first

Try to inflate the price of shares by buying them back on the market
 Blended

tender price =>  Market price goes up  Blended price should be substantially higher than the bid price (of $67.50 or $72.50)
• Time value of money • Market inherent risks
 Not

realizable in our case because of the amounts involved
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Option two: repurchase from Steinberg
 The

regulations set the repurchase price ceiling as average price for 30 days before the greenmail.
(S.1323 amending section 14d of the Securities Exchange Act of 1934)

•We can assume the average price for last month from the Exhibit 14: $62 •That’s definitely not enough to attract Steinberg •We need to give some premium above the price he paid
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Determination of Repurchase price
 

The dividend growth model provides no meaningful numbers, have to use another approach The M&A theory suggests to pay a premium during takeovers to buyback the shares that should be sufficient to  Cover all transaction costs of the raider  Provide him with his expected rate of return In a real life circumstances these is determined during the negotiations. For now, we can assume these numbers to be $0.50 per share of transaction costs, and a 2-3% rate of return on this transaction (not annual). The repurchase price would be $69.35-$70.03 with Gibson and $74.45-$75.18 without it.

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Who’s Fault: Ron Miller?

 Is

a former professional American football player, the son-in-law of Walt Disney, and a former president & CEO of The Walt Disney Company

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GUILTY or NOT GUILTY?
Founded future success:  Create Touchstone label  Establishment of The Disney Channel  Computer animation attempts Criticized leadership: • not focused on the operations of each business division • concentrated on the expansion of activities of real estate development • last thing they think of is their own shareholders

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Ethics of Greenmail

Disadvantages
 Discriminatory

Payment  Triumph of Certain Agents’ self-interest  Transfer Effect  “We are weak”

Advantages
 The

stress situation that may lead to higher economic efficiency
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Recommendations

Keep focus on Strategic Business Units
 Drop

the Real Estate segment  Use available proceeds for development of Film entertainment and Television
• Attract more professional staff in this industry
 

Change the management of the company Change dividend policy => retain more capital for company’s future growth Insure the future possible takeover attempts

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Thank You for Listening!

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