As reported yesterday, Comcast Corp. dropped its $48.7 billion unsolicited bid for Walt Disney Co., which put an end to a takeover battle that was in trouble from the start.
The bottom line on this saga is that Comcast’s management misjudged its the market and the Disney Board’s reaction to its offer. The former is reflected by the fact that, even though most stock prices fell yesterday, Comcast’s stock price rose, although not much (1%). Comcast’s shares are still 11% below where they were before the company’s Feb. 11 offer for Disney.
The theory behind Comcast’s bid was that years of poor performance at Disney and shareholder disenchantment over the leadership of Disney CEO Michael Eisner would make Disney an easy target. Initially, the bid looked interesting, but it became apparent quickly that the strategy had backfired when Disney’s Board refused to discuss the offer and hired poison pill expert Martin Lipton to advise it on the bid.
Moreover, when the value of the bid fell almost immediately below the value of Disney’s stock, the Disney Board could not be forced to act. Comcast’s offer of 0.78 share of Comcast for every share of Disney lost its premium of $2.38 a share immediately after it was announced, reflecting that Comcast shareholders and the market generally were not bullish on the deal. That gave the Disney Board a valid reason to ignore the bid. Before the bid was dropped, the offer was worth $23.77 a share, while Disney’s share price was $24.18. Inasmuch as increasing its offer for Disney in either stock or cash would have driven Comcast’s own stock price down, such a bid would have made it necessary to raise its bid yet again. So, with Comcast shareholders showing no enthusiasm for the deal, Comcast essentially could not raise its initial bid, which is almost always how unsolicited takeover offers ultimately are resolved.
Despite (or perhaps because of) the failed bid for Disney, Comcast continues to do quite well financially. The revenue of its cable systems rose $4.65 billion, or 9.8%, from the first quarter of 2003, and Comcast reported a profit of $65 million, or three cents a share (compared with a loss of $297 million, or 13 cents a share a year earlier). Comcast also announced resumption of its $1 billion stock-repurchase program. With the distraction of the Disney bid gone, Comcast management can now concentrate on less sexy but more productive acquisition targets, such as Adelphia Communications Corp., the country’s fifth-largest cable company, which is currently mired in bankruptcy.
Meanwhile, with Comcast’s withdrawal of its offer, Disney will shift the focus back to Mr. Eisner and whether he should be retained beyond the September 2006 expiration of his personal services contract with the company. Given Disney’s lackluster performance over the past decade, real questions remain whether Mr. Eisner is capable of sustaining a long-term turnaround and repairing glaring problems within the company, such as Disney’s reeling ABC television network.
The Disney Board still faces angry shareholders, 45% of whom attended the Disney annual meeting last month voted to oust Mr. Eisner. Next month, a committee of Disney executives and board members will meet with representatives of several public pension fund-investors in Disney, including the California Public Employees’ Retirement System, which have called on the Board to remove Mr. Eisner. The Disney Board also faces the continued public criticism of ex-directors Roy E. Disney and Stanley Gold, who issued a statement yesterday criticizing the board’s “complete indifference to the will and interests of its shareholders” and the appearance that “the only ‘succession plan’ is to keep Eisner as CEO for as long as he wants.”
Disney has projected earnings growth of more than 40% for the fiscal year that ends on Sept. 30, and it has predicted double-digit earnings growth through 2007. The company’s 2004 forecast has remained steady, despite such high profile mistakes as the movie “The Alamo,” which cost more than $100 million to make and has taken in only about $20 million in the U.S. since its release in early April. However, Disney’s theme-park business is making a solid comeback after being hammered by the 2001 recession and the travel slump resulting from the 9/11 attacks.
The most insightful commentator on the Comcast-Disney dance has been Professor Bainbridge, who is a bit under the weather and has not yet posted his views on the withdrawn bid. Meanwhile, Professor Ribstein over at IdeaBlog notes perceptively that “the price of acquisitions is so high now that it takes a near-delusional synergy theory to make ousting management of a major company even look plausible.”
Not buying the mouse
The good news is that the Comcast deal for Disney is dead. The synergy from combining content and cable never seemed to justify the acquisition, as I commented. So this would have been a bad deal for Comcast shareholders, a