Comcast's unexpected bid for Disney—and Disney's rapid rejection of the deal—have offered a thrilling exhibition of one of the business world's greatest sports: management mud wrestling. Whenever an embattled management team and board face an unwanted bid for their company, they fight back with the same desperate, dirty tactics—moves designed to protect their jobs, fend off a deal that offers shareholders a higher price than they've been able to deliver, and still make it seem like they're taking the bid seriously.
It's a tough game, but Disney CEO Michael Eisner and his crony-laden board know how to play it. Let's watch them in action.
Eisner and Co.'s first move was the Denial Stiff-Arm, in which the target of an unwanted takeover bid simply denies that the company is for sale. That's what Michael Eisner told Comcast CEO Brian Roberts when they spoke on the phone earlier this month. On Feb. 11, when Comcast formally proposed to acquire Disney in a hostile offer, Disney's initial response was cold. When Disney's board officially rejected the offer last Monday, it said the company wasn't interested in being sold. But there's no such thing as a public company that isn't interested in being sold. Every public company is for sale every day. That's the point of having your shares publicly traded.
Denial only works for a couple of days, especially when the stock price of the target moves up in anticipation of a potential acquisition or a bidding war. The day of Comcast's announcement, Disney's stock shot up 15 percent, from $24.08 to $27.60, overshooting the value of Comcast's all-stock offer.
So, Eisner moved on to a favored second maneuver: the Insult Half-Nelson, in which the company concedes that it theoretically could be for sale but that the price offered by the hostile bidder is so insufficient as to be insulting. In rejecting the offer, Disney's board promised to "carefully consider any legitimate proposal" that would increase shareholder value. (What responsible board wouldn't?) But like the maitre d' of a fancy restaurant brushing off tourists, it noted sadly that the parvenu simply didn't have the cash to patronize the establishment. The "interests of Disney shareholders would not be served by accepting any acquisition proposal that does not reflect fully Disney's intrinsic value and earnings prospects."
Upon close analysis, that doesn't wash either. The day before the Comcast offer, Disney traded at $24.08 a share. Presumably, had any investor been willing to buy 100 shares, or 100,000 shares, or 1 million shares, at $27 a share, Eisner or any board member would have been happy to sell. An acquisition would provide Disney shareholders with more value than existing management has been able to deliver in several years.
But since Comcast hasn't been deterred by the rejection, and since other bidders have failed to materialize—thus giving the lie to Disney's claim that the company is worth far more than the market says it's worth—Disney has moved on to a new tactic: the Brazen Back Flip, in which the target company goes on the offensive. Acknowledging that the company is in play, Eisner and his allies are floating a price that reflects the company's "real value." As Business Week reported, "the Disney board is said to feel that a bid that values the company at more than $60 billion—or more than $30 a share—could get its interest."
The $30 figure is a charade. It's so high that it will dissuade potential bidders, but the fact that the board is proposing it is supposed to signal shareholders that the board is really looking out for their best interest. But if the insiders are so certain that the company is undervalued, then surely Eisner and his chums have been buying tons of shares in the low $20s in anticipation of selling them back at $30. Of course they haven't. The record of insider trades shows that purchases by insiders have been meager over the last several months. They are as dubious about Eisner's Disney as everyone else.
All this mud wrestling is designed to obscure the key fact about Disney. At the beginning of February, Disney in the hands of an entrenched Michael Eisner and his go-along board was worth about $24 a share. When Comcast bid, the market determined that Disney in the hands of Comcast would be worth $27 a share. And now the board is suggesting that Disney in the hands of anybody but Eisner would be worth $30 a share.
In the late bull market, investors used to talk about a premium associated with a superstar executive. Investors would shell out more for a company run by Jack Welch or Warren Buffett. In the case of Disney, the reverse seems to be true. There is a $12 billion Eisner discount.