Disney Background:

- In July 1923, a young cartoonist named Walt Disney arrived in Hollywood, with drawing
materials under his arm, and $40 in his pocket
- With a $500 loan Walt and his brother Roy started their film business.
- There was no instant success for them in this era of silent pictures
- There first break came in 1928, with the production of Steamboat Willie, which was the
first cartoon with sound, and introduced Mickey Mouse
- Since then the name “Walt Disney” has become universally known as a symbol of family
entertainment.

Case Background:
- In 1984 Walt Disney Productions Inc. became the subject of a takeover attempt by Saul
Steinburg
- Steinburg was a well-known Corporate Raider
o His attempt to takeover Disney started with the announcements of a purchase of
6.3% of Disney outstanding common stock.
o In subsequent announcements, Steinburg’s holdings rose to 12.1%
- Disney started taking evasive actions, which included the purchase of Arvida corporation
and attempted to purchase Gibson Greetings in.
- On June 11, 1984 Steinburg retaliated with a public tender offer for 49% of the company
at $67.5 per share if the Gibson acquisition was completed, and 72.5 without. Before
the raid began Disney was trading around $50 a share
- Disney had two options:
o Offer to repurchase Steinburg’s shares
o Fight the offer in the courts and through the media
- Steinburg was a notorious greenmailer
o Greenmailing is the action of purchasing enough shares in a firm to challenge a
firm’s leadership with the threat of a hostile takeover to force the target
company to buy the purchased shares back at a premium in order to prevent a
hostile takeover.
o Steinburg was previously paid $47 million by Quaker State Oil company for the
same thing
Why were corporate raids so prevalent in the 1980s?
- The corporate raid which has since fallen out of favor involves the buyer acquiring a
significant stake in a target company (usually not a majority) and employing a variety of
tactics to temporarily boost the share price at the cost of the hallowing out the target
companies core assets
- Corporate raiders target companies perceived to have an unusually or unreasonably low
price to book ratio
o Can either make management changes or temporarily boost share prices or
simply sell of the company’s major assets for their book value
 That is why this particular type of hostile takeover is characterized as a "raid":
the hostile investor is actually hollowing out the business rather than merely
taking it away from the existing
o analysts estimated Disney’s raw-land holdings to be worth $300 million to $700
million. Disneyland was carried on the balance sheet at $20 million, although its
replacement value was estimated to be $140 million which is one reason
 calculated P/B to be close to one which indicates an undervalued stock

Business Activities of Disney:

- 1984: the company described itself as a diversified international company engaged in
family entertainment and community development
- Business activities were divided into four segments: theme parks, films, consumer
products, and real estate development.
o The idea was to form these segments into interlocking pieces of portfolio, each
supporting the activities of another
 - The entertainment and recreation segment included theme parks and resorts
o Disneyland covered 344 acres in Anaheim and the Disney World complex in
Orlando included 28,000 acres of land (twice the size of Manhattan), most of
which was undeveloped. Even before the Arvida acquisition, analysts estimated
Disney’s raw-land holdings to be worth $300 million to $700 million.
o Disneyland was carried on the balance sheet at $20 million, although its
replacement value was estimated to be $140 million. The company owned and
operated hotels consisting of 400 units of vacation villas and 5,163 rooms in
various locations. Management believed that its theme parks benefited
substantially from its reputation in the entertainment business and from its
other activities.
- In film entertainment, the company produced movies for release under its own label as
well as the Touchstone label, a brand oriented toward an adult audience.
o Certain movies proved to be an enduring source of cash, as indicated by the
billings of Snow White over the years
o The Disney Channel, a new venture into pay television, provided 19 daily hours
of entertainment through cable-system operators
o the company marketed 114 films and cartoon titles to the home-entertainment
market, principally for use with video recorders. The company’s studios included
44 acres in Burbank, California, and a ranch of 691 acres outside Burbank
- Real estate or community development was conducted through the company’s new
subsidiary, Arvida Corporation, acquired on June 6, 1984.
o Whereas Arvida was not a factor in the performance predating the takeover bid,
it now represented a significant asset in the valuation of the company. Arvida
owned or controlled the development of 17,334 acres of land in Florida, Georgia,
and California.
- In the area of consumer products, the company licensed the name Walt Disney, its
animated characters, literary properties, songs, and music to manufacturers, publishers,
and retailers. Historically, the returns in the consumer products segment were quite
high. For instance, in 1978 this segment gave a pretax return on assets of 179%.

What brought the problem on: Since death of Walt Disney in 1966. What made Disney
Susceptible to a takeover?
- Lack of creative leadership after death of walt
- Disney invested heavily in projects that failed to provide an adequate return. (find in
case)
 - The projects led to a depressed share price, however, the firm retained assets such as
their fil library and valuable raw land
o Steinburg saw the chance to buy Disney to restructure the firm and earn a
sizable return.
- Before the bid the shares were trading around $50.
- Steinburg revealed he payed $63.25 per share to get his stake in Disney before
mounting his hostile bid.
- Our estimated intrinsic value is estimated to be
 $82.48 using the three-stage cash flow to equity model
 $20.35 using the two stage dividend discount model
o Professional estimates ranged from $64-99 a share
o Hostile takeovers occur in response to a need for restructuring in an industry.
Disney if restructured could be worth more than currently valued

The Problem: What are the problems with paying a greenmailer?

- Disney had two options:
o Offer to repurchase Steinburg’s shares
o Fight the offer in the courts and through the media
- Paying the Greenmailer: what are the problems of paying a greenmailer?
o It is a discriminatory payment; not all public shareholders enjoy the right to sell
their shares to the company at the price paid to the greenmailers. It violates an
implied duty of fairness to all shareholders.
o It is viewed as the triumph of certain agents self-interest: senior managers rarely
welcome the consequences of a hostile takeover and so it is argued, sacrifice
shareholders wealth by paying greenmail to preserve their jobs.
o It is believed to effect significant transfers of wealth from the remaining public
shareholders to a more powerful raider. Research has shown that rest of
shareholders are poorer after greenmail; therefore consequences are bad
 o Greenmail payments are actions not freely conceived and may set the pattern
for further intimidation; expediency is a bad precedent.
o Essentially, paying greenmail is a sign of weakness

- Us securities laws limit the extent to which the opposing sides in a hostile takeover contest
can engage each other.

Possible outcome of actions:

- If Miller fights, and loses the firm to Steinberg, the company would most likely be
restructured, which could mean an end to their interlocking pieces of their portfolio.
- Greenmail, if purchased in a sufficient amount of time and with operating flexability
might give Disney the space needed in which to restructure itself and improve
shareholder value.
o Greenmail would give Miller and directors the discretion over how to restructure
and realize greater shareholder value without sacrificing the unique operating
virtues of the firm.
- Miller could pay the greenmail and begging executing a restructuring of Disney.
o This move would allow everybody to gain from the benefits.
- Miller could offer to repurchase share from the public instead of the greenmailer
o This would give cash to the public instead of the Steinburg, and enhance the
freedom of chouce of the public shareholder.
o Public shareholders could elect to receive the steinburgs price per share or hold
o Decision to pay greenmail versus the alternative ultamatly depends on the
wealth creation/ wealth-transfer effects each choice may have

How the public may react:

- Stock prices usually fall after greenmail is paid.
- Greenmail payments take target companies out of play.
o The market in the firms stock is equilibrating away from highly opportunistic
clientele back toward long-term investors.
- Paying greenmail still makes economic sense if the wealth transfer to remaining
shareholders is positive.

Conclusion:

- Disney should pay Saul Steinburg.

o The price paid should be less than the intrinsic value
o Disney will have to make realizing the true intrinsic value of the firm to
remaining shareholders a top priority; i.e. restructuring
- What should the price be?
o It should be as low as possible but still have an inventive for Steinburg to sell.
o 50% gain
 o His cost 63.25

Why have hostile takeover slowed down so much?

- More defenses
- “poison pill”
-