Possible Engagement with the Other Side
U.S. securities laws limit the extent to which the opposing sides in a hostile takeover contest can engage each other. Material developments mentioned in any conversation with the counterparty may need to be disclosed in public filings with the SEC. This constrains what can be said directly. But through emissaries, it was possible to negotiate a disengagement of the hostile action through a greenmail payment.
Long-Term Validity of the Action
The consequences judged over the long term probably appeared stark for employees and suppliers. If Miller fought and lost the firm to Steinberg, the company would be restructured, possibly ending the creative marriage of animated films and theme parks that Walt Disney consummated. As a believer in Walt’s vision, Miller probably felt that this would be a net loss for consumers and the entertainment industry. Greenmail, if it purchased sufficient time and operating flexibility, might grant the firm space in which to restructure itself and improve shareholder welfare. Doing so would give the CEO and directors discretion over how to restructure and realize greater shareholder value without sacrificing the unique operating virtues of the firm.
Alternatives
Miller had at least two alternatives to paying greenmail. One was to announce and execute a restructuring of the firm along the lines the raider would have to do to unlock latent value. This move would allow both the raider and the public to participate in the benefits. The second alternative was to offer to repurchase shares from the public instead of the greenmailer, as happened in the case of T. Boone Pickens’s attempted raid on Unocal. This would siphon cash to the public at the expense of the raider and enhance the freedom of choice of the public shareholder: He or she could elect to receive the greenmailer’s price per share or hold onto the shares in hopes of eventually receiving the intrinsic value per share. The decision to pay greenmail versus the alternatives ultimately depends on the wealth-creation/wealth-transfer effects each choice may have.
Public Reaction
The payment of greenmail is routinely condemned by analysts, investors, editorial writers, and public officials. Stock prices usually fall after greenmail is paid. Greenmail payment takes a target company “out of play” (i.e., it removes the immediate threat of takeover). Terminating the takeover process induces frantic selling by arbitrageurs. The market in the firm’s stock is equilibrating away from highly opportunistic clientele back toward long-term investors. Moreover, investors cannot know as much as managers about a firm’s prospects. The problem is essentially one of signaling or investor relations, which, by and large, firms do poorly. Even if management never talks to shareholders, however, and instead waits for intrinsic value eventually to become manifest in operating performance, paying greenmail still makes economic sense if the wealth transfer to the remaining shareholders is positive.
Conclusion
Should Disney pay greenmail to Saul Steinberg? Various perspectives would seem to support it. Focusing on shareholder welfare, assume that (1) the price paid by Walt Disney Productions per Steinberg share is less than the intrinsic value, (2) Disney makes realizing the intrinsic value for remaining shareholders a top priority (via operational changes and better investor relations), and (3) the effect on share price is superior to restructuring or other defenses; the result then is an economic gain for the remaining shareholders of Disney. What should the price be? It should be as low as possible, consistent with an incentive for Steinberg to sell—certainly no higher than the estimated intrinsic value. Raiders and arbitrageurs look for annualized rates of return above 50 percent. Assuming Steinberg bought his shares on March 1, 1984, his holding period to the date of the case was 103 days. Thus, he would seek an interim gain of 14 percent in order to achieve an annualized gain of 50 percent. Steinberg’s apparent cost basis was $63.25, suggesting a greenmail price of $72.11 (114 percent of cost).
The decision to pay greenmail is difficult because of the ambiguity and conflicting tugs of various arguments; but wrestling with these inenviable problems is what chief executives are paid to do. Although the economic analysis outlined here sheds light on the consequences of paying greenmail, nothing in the analysis should be construed as suggesting that the decision can be reduced to a simple rule.
Outcome
On June 12, 1984, Disney’s chief executive officer announced an agreement to buy Steinberg’s shares for $77.45 per share, yielding a 78 percent annualized return on investment to him. On that day, Disney shares closed at $49.00, down $5.25, or 9.7 percent, from the previous close. Two days later, the first of many shareholder lawsuits protesting the payment was filed.
Then, on July 17, Irwin Jacobs, another raider, mounted a hostile bid for Disney. The Bass family, wealthy investors who had gained a significant stake in Disney as a result of an earlier transaction with Disney, undertook a series of actions to defuse Jacobs. First, the Bass group purchased large blocks of stock from Michael Milken and Ivan Boesky, and then purchased Jacobs’ shares, in effect paying a second round of greenmail. With Jacobs’ departure, the directors could focus their attention on underlying problems at the company. Apparently sensing that the two raids indicated fundamental problems in management, the board of directors fired Ronald Miller as CEO; other senior managers soon left the company as well. A major management housecleaning took place following the raids.
More importantly, the focus of the firm’s strategy shifted from real property back to creative capital with the hiring of the new chief executive officer, Michael Eisner, from Paramount. While campaigning for the CEO position, Eisner is reported to have said to Sid Bass, “It’s going to take a creative person to run this company. Look at the history of American companies. They have always gotten into trouble when the creative people are replaced by the managers. Walt Disney Productions can’t allow that to happen to it.”21
Eisner’s strategy of returning to the creative core of the company was successful. For the next 10 years, Disney showed a ninefold increase in net income. The compound annual growth in stock price from June 1984 to May 1993 was 34 percent.
CONCLUSION
Analysis of ethical issues in M&A is important but not easy. Ethical issues pervade the M&A environment. And as I argued in Chapter 1, ethics is one of the pillars on which stands success in M&A. Therefore, the M&A deal designer must learn to identify, analyze, and act on ethical issues that may arise.
This chapter has sketched a framework of reflection that draws on the long literature of ethics. Consequences, duties, and virtues stand out as three important reference points for reflection. Nevertheless, the results of such analysis are rarely clear-cut. Indeed, the five cases outlined in the introduction to this chapter will find rational arguments on each side of the question and raise classic problems for further consideration:
1 Prettying up a firm for sale. In general, this book takes a strong stance against earnings management. Chapters 16 and 17 spell out why. As usually practiced, earnings management fails all three ethical tests: It breaks duties