The 1980’s was an era known for a lot of things.
The Brat Pack, time travelers, hair bands, and cabbage patch dolls.
In the world of Wall Street, however, it was known for something else: corporate raiding.
Bud: I just found out about the garage sale down at Bluestar. Why?
Gordon: Well you're walking around blind without a cane pal. A fool and his money are lucky enough to get
together in the first place.
Bud: But why do you need to wreck this company?
Gordon: BECAUSE IT'S WRECK-ABLE, ALRIGHT!?
Corporate Raiding, as a general concept, is when an individual or company purchases a
significant number of shares of another company.
The more shares that person or company owns, the more voting power they have within the
company they’re raiding.
In some cases they use that voting power to advocate for changes at that company that’ll
result in higher short term profits, which in turn raises the stock price, which allows
them to sell their stake and turn a profit themselves.
In other cases they want to completely take over the company, usually to the same effect.
Among the more prolific corporate raiders of the time was a man named Saul Steinberg.
Steinberg’s flavor of corporate raiding involved takeovers, or at the very least the
perception and threat of a takeover.
The Brooklynite businessman first made a name for himself in the late ‘60’s, when he
started a venture called the Ideal Leasing Company, which leased IBM computers to clients.
He was able to use that company, later renamed to Leasco Data Processing Equipment Corporation,
perhaps the most boring company name ever, to sell public shares and use the money to
acquire a much larger insurance firm called the Reliance Insurance Company.
In all honesty, while he became known for that Reliance acquisition, it would be one
of the few companies he would actually take over.
For the most part he thrived by making it look like he was about to take over a company.
US Security and Exchange Commission rules state that at a certain point you have to
submit a filing, announcing your intentions when it comes to large stock purchases.
So Steinberg would buy, buy, and buy some more.
It would start to paint the picture that he was intending to eventually purchase controlling
interest in that target company.
The target company, understandably, usually doesn’t want to be taken over.
A takeover means a potential change in leadership, a potential change in how they do business,
and in some cases a potential risk of the company just being broken apart and sold off
in smaller pieces to other sellers.
The target company would have a number of tools at their disposal to try and ward off
the takeover, but most of them were bad news.
One popular method that Steinberg had thrived off of was offering to sell the shares he
had purchased back to the company, but at a premium price.
It was called greenmail and in the 1970’s and 80’s Saul Steinberg had successfully
pulled it off over a dozen times.
Gordon: Buddy, what's the fair price for that stock?
Bud: The breakup value is higher. It's worth $80.
Gordon: So what do you way to $72?
Larry: You're a two-bit pirate and greenmailer, nothing more.
Gordon: My mail is the same color as yours is pal.
Generally caving to greenmail works, since the corporate raider is usually looking to
turn a quick profit.
As it turns out, accepting more money to just go away is a lot less work than actually taking
over a company and running it.
The problem, for the target company, is three-fold.
For one, it involves paying off the corporate raider, which is a blow to their finances.
Usually a company targeted for a takeover isn’t expecting it, and so they’re typically
not ready to buy large pieces of their company back.
Secondly, it often angers their other shareholders.
Those other shareholders see the corporate raider get a premium price for the stock,
but they don’t.
It can sometimes actually result in those shareholders suing the company over it.
Lastly, paying greenmail to a corporate raider sends a message to the public, and more importantly
other corporate raiders, that greenmail works.
Sure, it might make this one specific problem go away, but it only increases the chances
of another corporate raider coming around and trying the same exact thing.
In early 1984, Saul Steinberg saw the vulnerable position that Disney was in.
At $49, down from a 52-week high of $84 a share, their stock wasn’t doing so hot.
However, they were still a company with a lot of valuable assets.
The potential was there, it just wasn’t being exploited.
So Steinberg began to buy up Disney stock.
Now at this point Steinberg had already earned his reputation as a corporate raider.
So by simply buying those initial shares, Disney knew what the intentions were.
There was no uncertainty.
They knew they were facing trouble.
They had to act, and they had to act quickly.
Walt Disney Productions sought out the services of Morgan Stanley & Co, to explore their options
for warding off Steinberg.
Of course they could pay the greenmail, however Morgan Stanley advised
against it for all of the reasons previously mentioned.
Their other strategies included a leveraged buyout, selling pieces of themselves, a white
knight, and pricey acquisitions.
A leveraged buyout, in this instance, is when a company essentially buys enough shares of
themselves to have a controlling stake, or buys all of the shares to take the company
private again.
To pay for such an expensive purchase, the company leverages parts of themselves as collateral for a loan.
So for instance Disney might have been able to leverage the theme parks.
This is risky, because while it may successfully block raiders from trying to take over, it
weighs down the company with significant debt.
Furthermore, it weighs them down with debt at a time where their financials were stagnant
enough to prompt the takeover attempt to begin with.
Alternatively, Disney could just sell parts of its assets as a means of making themselves
less of an appealing target.
For instance, they could sell off the theme parks or the animation studio.
For obvious reasons, this is the least appealing method.
It might scare away a raider, but it would also likely scare away plenty of other investors.
It would also stand to hurt the business in the long term.
After all, they weren't looking to get rid of those assets to begin with.
Finding a white knight, in the context of a takeover, means finding an investor or company
with benevolent intentions who would be willing to acquire the company, or enough stake in
the company that together with management they’d be able to prevent the raider from
gaining a controlling stake.
It, too, is not very appealing, as it still results in the company either being taken
over or being held to the will of an outside party.
Maybe that white knight is looking to help today, but it doesn’t mean they’ll still
be looking to help tomorrow.
Lastly, there were acquisitions.
It might seem odd for a company being targeted for a takeover to, themselves, take over another company.
However the idea is that by acquiring a smaller company with an all stock purchase, it would
dilute the shares of that company and, in effect, reduce the percentage of the company
that the raider owned.
If it was done once or twice, it might dilute the raider’s shares enough to dissuade them
from continuing with the attempt.
After all, this was all business, and at the end of the day what mattered most for raiders
was that the prices were right.
Once a takeover attempt proved too costly for them, they’d be more likely to give
up and sell their shares.
Gordon: You win a few, you lose a few, but you keep on fighting.
-and if you need a friend, get a dog.
The problem with this strategy is that it involves buying one or more companies.
That’s not cheap, and again this is happening at a time where they're already in a financial
rough patch.
Not to mention if the companies purchased didn’t seem like they were purchased for
the right reasons, it could prompt trouble from shareholders who would see the acquisitions
as a result of poor management.
So here’s Disney, faced with the threat of a takeover.
They have multiple options at their disposal, but none of them are really great.
But, that was just the reality of the situation.
Over a decade of stagnation had brought them to this very moment.
This was a battle for survival.
It wasn’t going to be pretty.
Paying greenmail was out of the question.
A white knight would be nice, but probably hard to come by.
Selling assets was perhaps a last resort option.
And a leveraged buyout wasn’t on the table for Disney themselves, but interestingly enough
somebody else was considering a leveraged buyout.
While Roy E Disney had left his position at the studio in 1977, he remained on the board
during the years following.
But with what he considered the continued degradation of his uncle and father’s company,
he felt like it was time to act.
Roy realized that if he was going to act independently to try and save Disney, he’d have to avoid
any conflicts of interest, and that meant resigning from the Disney board.
So on March 8th, 1984, that’s exactly what he did.
Once he left, he began to explore the possibility of a buyout of Walt Disney Productions.
His own company, Shamrock Holdings, hired an independent firm to run a study on what
it would take for him to beat Steinberg to the punch and buy Walt Disney Productions himself.
It turned out that it would cost Roy over two billion dollars to make the deal happen.
Roy, while wealthy, did not have two billion dollars to spare.
To go through with the plan would mean finding financial backers, and that would involve
carving up the company to pay for it.
This was 1984, so by this point Disney World was just 13 years old and Disneyland was 29
years old.
The studio, however, was over 60 years old.
To Roy, the real heart of the company was the film and animation branch.
So with that in mind, the leveraged buyout was considered with the idea that it would
be the theme parks that would be potentially sold off to pay for the acquisition.
Roy had to consider if it was worth breaking up the company just to save it.
While the takeover attempt was at the forefront of every Disney executive’s mind and the
options were being considered, they were still Walt Disney Productions.
They still had to operate day to day as a company.
It was a critical event that could alter the future of the company, but they still had
to plan for the future in the event it wouldn’t.
One such way they looked to the future was by looking for help in ways to develop and
make use of the massive amounts of land Walt had purchased in secret for Walt Disney World.
Perhaps making use of that land could help their bottom line and their stock price, aiding
in the effort to keep Steinberg away.
In April of 1984, Disney reached out to a Floridian real estate developer
by the name of the Arvida Corporation to explore the idea of hiring them as a consultant.
Consulting wasn’t really Arvida’s thing, but then again this was Disney and it was
a lot of Floridian land, so they were open to the idea.
However just as quickly as those discussions began, one of the owners of Arvida came back
with a better idea.
An idea that might help them in their fight against Saul Steinberg.
Why hire Arvida, when you can just buy Arvida?