February 11, 2004

Maximizing Shareholder Value

In my last post I talked about how I believe that the sale of Disney is now, basically, a foregone conclusion. Let me explain why.

The CEO and Board of Directors have one goal when in the employ of a public company: maximize shareholder value. They don't need to be charismatic. They don't need to be innovative. They don't need to have ice water running through their veins. Those personality traits all help immensely, but in the end greed is good. They were hired to be greedy. They were employed to gather the greatest possible value for their shareholders.

CEO and Boards have been sued many times in the past for failing to maximize shareholder value. Most of the suits are bogus and get tossed out pretty quick, but the fact that they can even be filed demonstrates the importance of maximization.

Companies that are doing well, returning decent growth numbers every year usually are not targets for unsolicited takeovers. Why? Because there is a reasonable and defensible belief that shareholder value is being best served by the current management team.

Most boards want to keep the company independent (I'm guessing that there is a greed factor in that, also, since the directors are paid handsomely for their oversight duties) which is why they are so apt to change the management team should the maximization of shareholder value begin to falter. They have seen the history. Companies that are afraid to shake it up at the top end up either being taken over or becoming failures. Now there is, of course, a point at which too much shaking up becomes a problem in and of itself, but still, sometimes change is good.

Disney has needed to make a change at the top for a while. Eisner has not had the magic. It was well known on Wall Street. It is well known in Orlando area (at least for anyone who has been around here for a while). It was even known amongst the Board. Remember Roy Disney's departure from the company a while back? The signs were out there. People in power just didn't heed them.

And now Disney is a takeover target. Comcast offered to buy the company out for 10% premium. 10% for one of the true icons of Americana. A franchise like Walt Disney should have been able to command much, much more than that as an opening bid. 10% for Mickey Mouse. It just goes to show how far the fortunes of the company have fallen over the last few years.

It would be very difficult for the company to make the argument that the current management team will be able to provide returns that justify turning down the deal. The Eisner team hasn't performed up to standards over the last five years. Yes, he has done a pretty good job of managing to the quarterly numbers. But along the way he has allowed the company to lose its vision towards the future and as a result the company has stagnated. Disney has no great plans. It has nothing earth-shatteringly exciting on the drawing board. It is a company marking time right now.

And so, Comcast, believeing that they could do a better job of managing such a great franchise, has put the company in play. Unless Eisner can pull some great secretive plan to overhaul the company out of Mickey's magic hat, he needs to now start concentrating on finding other suitors for the company and starting a bidding war. That will be the only way that he will be able to ensure that he has, in his last days as CEO, maximized the shareholder value.

Is starting a bidding war greedy? Yep. But as Gordon Gecko said: Greed is good.

It's time for Eisner to get greedy for the shareholders instead of himself.

Posted by Chris at February 11, 2004 09:36 AM | TrackBack | Linked by:
Comments

Came upon you Blog looking for discussion of Issues with smart Moderates (for own sanity away from the biased extremists on either side and know other smart Moderates feel the same as have been thinking of starting own if necessary).

Regarding Disney takeover, profits, directors, and shareholders:

Many Moderates now find that the Disney empire, its kind of growth, all its marketed plastic toys, and its practices to be repulsive, especially in such stark contrast to Walt Disney's views.

Have you not seen what has occurred in the last twenty years and not concluded that Corporations must make some changes or our economy is going to implode? Shareholders interests only?
Quartely profits showing on the books?

American corporations must move closer to resemble the Japanese in many aspects (not all) or the U.S. economy is doomed.

If you still believe in what the so-called sc of university Econ teaches and its followers as advisers everywhere, then you don't get it real world at all--or yet and until it will be too late for this country.


Alexis

Posted by: Alexis at February 13, 2004 03:07 PM

Shareholder interests only? Absolutely. That is the essence of capitalism and I have still yet to find an economic system that works better than capitalism.

Now could US corporations learn something from their Japanese counterparts? Sure. As I see it, the most important thing we could take away would be the effectiveness of long term planning and action. Too often, US corporations focus on the quarterly results instead of looking to see where they need to be positioned in five to ten years.

It is important to remember that more often than not the interests of the employees and that of the shareholders coincide. Even layoffs are more often than not a coincidence of interests. When layoffs become necessary it is usually because management has taken a short term approach and has failed everyone by not adapting to a changing environment. In that case it often becomes true that the only way to save the company is to sacrifice a few. Some suffer, but ultimately it is better for society as a whole as the company survives to employ another day.

Posted by: Chris at February 13, 2004 09:45 PM

Someone posted on the web that you are a stockbroker. You doo seem like you have some other moderate views. If I am to return for continued discussion, I suggest you keep away from stocks topics. Once a day articel would be fine.

Free enterprise? Invisible hand? That doesn't work... even if that was true. The games are massive and controlled, which anyone with some sophistication well knows. Have not only studied greatly on my own, but seen some cycles here and elsewhere to deduce some key things.

I am not naive nor a novice. Many changes should have been implemented in the U.S. economy at
least twenty five years ago to ensure its viability.


Alexis

Posted by: Alexis at February 14, 2004 11:55 AM


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