the worst board ever? the disney experience -...
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Theworstboardever?TheDisneyExperience-1997
AswathDamodaran
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TheCalpersTestsforIndependentBoards
AswathDamodaran
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¨ Calpers,theCaliforniaEmployeesPensionfund,suggestedthreetestsin1997ofanindependentboard:¤ Areamajorityofthedirectorsoutsidedirectors?¤ Isthechairmanoftheboardindependentofthecompany(andnottheCEOofthecompany)?
¤ ArethecompensaKonandauditcommiLeescomposedenKrelyofoutsiders?
¨ DisneywastheonlyS&P500companytofailallthreetests.
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BusinessWeekpileson…TheWorstBoardsin1997..
AswathDamodaran
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ApplicaKonTest:Who’sonboard?
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¨ Lookattheboardofdirectorsforyourfirm.¤ Howmanyofthedirectorsareinsidedirectors(Employeesofthefirm,
ex-managers)?¤ IsthereanyinformaKononhowindependentthedirectorsinthefirm
arefromthemanagers?¨ Arethereanyexternalmeasuresofthequalityofcorporate
governanceofyourfirm?¤ Yahoo!Financenowreportsonacorporategovernancescorefor
firms,whereitranksfirmsagainsttherestofthemarketandagainsttheirsectors.
¨ Istheretangibleevidencethatyourboardactsindependentlyofmanagement?¤ ChecknewsstoriestoseeifthereareacKonsthattheCEOhaswanted
totakethattheboardhasstoppedhimorherfromtakingoratleastslowedhimorherdown.
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So,whatnext?Whenthecatisidle,themicewillplay....
AswathDamodaran
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¨ Whenmanagersdonotfearstockholders,theywillo\enputtheirinterestsoverstockholderinterests¤ Greenmail:The(managersof)targetofahosKletakeoverbuyoutthe
potenKalacquirer'sexisKngstake,atapricemuchgreaterthanthepricepaidbytheraider,inreturnforthesigningofa'standsKll'agreement.
¤ GoldenParachutes:Provisionsinemploymentcontracts,thatallowsforthepaymentofalump-sumorcashflowsoveraperiod,ifmanagerscoveredbythesecontractslosetheirjobsinatakeover.
¤ PoisonPills:Asecurity,therightsorcashflowsonwhicharetriggeredbyanoutsideevent,generallyahosKletakeover,iscalledapoisonpill.
¤ SharkRepellents:AnK-takeoveramendmentsarealsoaimedatdissuadinghosKletakeovers,butdifferononeveryimportantcount.TheyrequiretheassentofstockholderstobeinsKtuted.
¤ Overpayingontakeovers:AcquisiKonso\enaredrivenbymanagementinterestsratherthanstockholderinterests.
No stockholder approval needed…
.. Stockholder Approval needed
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Overpayingontakeovers
AswathDamodaran
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¨ Thequickestandperhapsthemostdecisivewaytoimpoverishstockholdersistooverpayonatakeover.
¨ Thestockholdersinacquiringfirmsdonotseemtosharetheenthusiasmofthemanagersinthesefirms.StockpricesofbiddingfirmsdeclineonthetakeoverannouncementsasignificantproporKonoftheKme.
¨ Manymergersdonotwork,asevidencedbyanumberofmeasures.¤ TheprofitabilityofmergedfirmsrelaKvetotheirpeergroups,doesnotincreasesignificantlya\ermergers.
¤ Anevenmoredamningindictmentisthatalargenumberofmergersarereversedwithinafewyears,whichisaclearadmissionthattheacquisiKonsdidnotwork.
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AcasestudyinvaluedestrucKon:EastmanKodak&SterlingDrugs
Kodakentersbiddingwar¨ Inlate1987,EastmanKodak
enteredintoabiddingwarwithHoffmanLaRocheforSterlingDrugs,apharmaceuKcalcompany.
¨ ThebiddingwarstartedwithSterlingDrugstradingatabout$40/share.
¨ At$72/share,Hoffmandroppedoutofthebiddingwar,butKodakkeptbidding.
¨ At$89.50/share,KodakwonandclaimedpotenKalsynergiesexplainedthepremium.
Kodakwins!!!!
!
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EarningsandRevenuesatSterlingDrugs
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Sterling Drug under Eastman Kodak: Where is the synergy?
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,000
1988 1989 1990 1991 1992
Revenue Operating Earnings
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KodakSaysDrugUnitIsNotforSale…but…
AswathDamodaran
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¨ AnarKcleintheNYTimesinAugustof1993suggestedthatKodakwaseagertosheditsdrugunit.¤ Inresponse,EastmanKodakofficialssaytheyhavenoplanstosellKodak’sSterlingWinthrop
drugunit.¤ LouisMams,ChairmanofSterlingWinthrop,dismissedtherumorsas“massivespeculaKon,
whichfliesinthefaceofthestatedintentofKodakthatitiscommiLedtobeinthehealthbusiness.”
¨ Afewmonthslater…Takingastrideoutofthedrugbusiness,EastmanKodaksaidthattheSanofiGroup,aFrenchpharmaceuKcalcompany,agreedtobuytheprescripKondrugbusinessofSterlingWinthropfor$1.68billion.¤ SharesofEastmanKodakrose75centsyesterday,closingat$47.50ontheNewYorkStock
Exchange.¤ SamuelD.Isalyananalyst,saidtheannouncementwas“verygoodforSanofiandverygood
forKodak.”¤ “WhenthedivesKturesarecomplete,KodakwillbeenKrelyfocusedonimaging,”saidGeorge
M.C.Fisher,thecompany'schiefexecuKve.¤ TherestoftheSterlingWinthropwassoldtoSmithklinefor$2.9billion.
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TheconnecKontocorporategovernance:HPbuysAutonomy…andexplainsthepremium
AswathDamodaran
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Ayearlater…HPadmitsamistake…andexplainsit…
AswathDamodaran
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ApplicaKonTest:Whoowns/runsyourfirm?
AswathDamodaran
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¨ Lookat:BloombergprintoutHDSforyourfirm¨ Whoarethetopstockholdersinyourfirm?¨ WhatarethepotenKalconflictsofintereststhatyousee
emergingfromthisstockholdingstructure?
Control of the firm
Outside stockholders- Size of holding- Active or Passive?- Short or Long term?
Inside stockholders% of stock heldVoting and non-voting sharesControl structure
Managers- Length of tenure- Links to insiders
Government
Employees Lenders
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Case1:SplinteringofStockholdersDisney’stopstockholdersin2003
Aswath Damodaran
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Case2:VoKngversusNon-voKngShares&GoldenShares:Vale
Vale Equity
Common (voting) shares3,172 million
Preferred (non-voting)1,933 million
Golden (veto) shares owned
by Brazilian govt
Valespar(54%(Non/Brazilian(
(ADR&Bovespa)(29%(
Brazilian(Ins=tu=onal(6%(
Brazilian(retail(5%( Brazilian(
Govt.(6%(
Valespar(1%(
Non.Brazilian((ADR&Bovespa)(
59%(
Brazilian(Ins<tu<onal(18%(
Brazilian(retail(18%(
Brazilian(Govt.(4%(
Litel&Participaço 49.00%Eletron&S.A. 0.03%Bradespar&S.A. 21.21%Mitsui&&&Co. 18.24%BNDESPAR 11.51%
Valespar(ownership
Vale has eleven members on its board of directors, ten of whom were nominated by Valepar and the board was chaired by Don Conrado, the CEO of Valepar.
Aswath Damodaran
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Case3:CrossandPyramidHoldingsTataMotor’stopstockholdersin2013
Aswath Damodaran
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Case4:LegalrightsandCorporateStructures:Baidu¨ TheBoard:Thecompanyhassixdirectors,oneofwhomisRobinLi,
whoisthefounder/CEOofBaidu.Mr.LialsoownsamajoritystakeofClassBshares,whichhavetenKmesthevoKngrightsofClassAshares,granKnghimeffecKvecontrolofthecompany.
¨ Thestructure:BaiduisaChinesecompany,butitisincorporatedintheCaymanIslands,itsprimarystocklisKngisontheNASDAQandthelistedcompanyisstructuredasashellcompany,togetaroundChinesegovernmentrestricKonsofforeigninvestorsholdingsharesinChinesecorporaKons.
¨ Thelegalsystem:Baidu’soperaKngcounterpartinChinaisstructuredasaVariableInterestEnKty(VIE),anditisunclearhowmuchlegalpowertheshareholdersintheshellcompanyhavetoenforcechangesattheVIE.
Aswath Damodaran
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Thingschange..Disney’stopstockholdersin2009
AswathDamodaran
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II.Stockholders'objecKvesvs.Bondholders'objecKves
AswathDamodaran
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¨ Intheory:thereisnoconflictofinterestsbetweenstockholdersandbondholders.
¨ Inprac3ce:StockholderandbondholdershavedifferentobjecKves.Bondholdersareconcernedmostaboutsafetyandensuringthattheygetpaidtheirclaims.StockholdersaremorelikelytothinkaboutupsidepotenKal
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Examplesoftheconflict..
AswathDamodaran
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¨ Adividend/buybacksurge:Whenfirmspaycashoutasdividends,lenderstothefirmarehurtandstockholdersmaybehelped.Thisisbecausethefirmbecomesriskierwithoutthecash.
¨ Riskshi\ing:Whenafirmtakesriskierprojectsthanthoseagreedtoattheoutset,lendersarehurt.LendersbaseinterestratesontheirpercepKonsofhowriskyafirm’sinvestmentsare.Ifstockholdersthentakeonriskierinvestments,lenderswillbehurt.
¨ Borrowingmoreonthesameassets:Iflendersdonotprotectthemselves,afirmcanborrowmoremoneyandmakeallexisKnglendersworseoff.
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AnExtremeExample:UnprotectedLenders?
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III.FirmsandFinancialMarkets
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¨ Intheory:Financialmarketsareefficient.ManagersconveyinformaKonhonestlyandandinaKmelymannertofinancialmarkets,andfinancialmarketsmakereasonedjudgmentsoftheeffectsofthisinformaKonon'truevalue'.Asaconsequence-¤ Acompanythatinvestsingoodlongtermprojectswillberewarded.
¤ ShorttermaccounKnggimmickswillnotleadtoincreasesinmarketvalue.
¤ Stockpriceperformanceisagoodmeasureofcompanyperformance.
¨ InpracKce:Therearesomeholesinthe'EfficientMarkets'assumpKon.
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ManagerscontrolthereleaseofinformaKontothegeneralpublic
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¨ InformaKonmanagement(Kmingandspin):InformaKon(especiallynegaKve)issomeKmessuppressedordelayedbymanagersseekingabeLerKmetoreleaseit.WhentheinformaKonisreleased,firmsfindwaysto“spin”or“frame”ittoputthemselvesinthebestpossiblelight.
¨ Outrightfraud:Insomecases,firmsreleaseintenKonallymisleadinginformaKonabouttheircurrentcondiKonsandfutureprospectstofinancialmarkets.
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Evidencethatmanagersdelaybadnews?
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DO MANAGERS DELAY BAD NEWS?: EPS and DPS Changes- byWeekday
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Monday Tuesday Wednesday Thursday F r i d a y
% Chg(EPS) % Chg(DPS)
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SomecriKquesofmarketefficiency..
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¨ InvestorirraKonality:ThebaseargumentisthatinvestorsareirraKonalandpriceso\enmovefornoreasonatall.Asaconsequence,pricesaremuchmorevolaKlethanjusKfiedbytheunderlyingfundamentals.EarningsanddividendsaremuchlessvolaKlethanstockprices.
¨ ManifestaKonsofirraKonality¨ ReacKontonews:Somebelievethatinvestorsoverreactto
news,bothgoodandbad.OthersbelievethatinvestorssomeKmesunderreacttobignewsstories.
¨ Aninsiderconspiracy:Financialmarketsaremanipulatedbyinsiders;PricesdonothaveanyrelaKonshiptovalue.
¨ Shorttermism:Investorsareshort-sighted,anddonotconsiderthelong-termimplicaKonsofacKonstakenbythefirm
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Aremarketsshortsightedandtoofocusedonthenearterm?Whatdoyouthink?
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¨ Focusingonmarketpriceswillleadcompaniestowardsshorttermdecisionsattheexpenseoflongtermvalue.a. Iagreewiththestatementb. Idonotagreewiththisstatement
¨ AllowingmanagerstomakedecisionswithouthavingtoworryabouttheeffectonmarketpriceswillleadtobeLerlongtermdecisions.a. Iagreewiththisstatementb. Idonotagreewiththisstatement
¨ Neithermanagersnormarketsaretrustworthy.RegulaKons/lawsshouldbewriLenthatforcefirmstomakelongtermdecisions.a. Iagreewiththisstatementb. Idonotagreewiththisstatement
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Aremarketsshortterm?Someevidencethattheyarenot..
AswathDamodaran
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¨ Valueofyoungfirms:Therearehundredsofstart-upandsmallfirms,withnoearningsexpectedinthenearfuture,thatraisemoneyonfinancialmarkets.WhywouldamyopicmarketthatcaresonlyaboutshorttermearningsaLachhighpricestothesefirms?
¨ CurrentearningsvsFuturegrowth:Iftheevidencesuggestsanything,itisthatmarketsdonotvaluecurrentearningsandcashflowsenoughandvaluefutureearningsandcashflowstoomuch.A\erall,studiessuggestthatlowPEstocksareunderpricedrelaKvetohighPEstocks
¨ MarketreacKontoinvestments:ThemarketresponsetoresearchanddevelopmentandinvestmentexpendituresisgenerallyposiKve.
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Ifmarketsaresoshortterm,whydotheyreacttobiginvestments(thatpotenKallylowershorttermearnings)soposiKvely?
AswathDamodaran
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