Hostile Acquisitions Who do they hurt

Given the information presented in this chapter, which of the following groups is likely to be the most likely to be protected by a law banning hostile takeovers?

a. Stockholders of target companies b. Managers and employees of well-run target companies c. Managers and employees of badly-run target companies d. Society

Illustration 2.5: Restive Stockholders and Responsive Managers: The Disney Case

In 1997, Disney was widely perceived as having an imperial CEO in Michael Eisner and a captive board of directors. After a series of missteps including the hiring and firing of Michael Ovitz and bloated pay packages, Disney stockholders were restive but there were no signs of an impending revolt at that time. As Disney's stock price slid between 1997 and 2000, though, this changed as more institutional investors made their displeasure with the state of corporate governance at the company. As talk of hostile takeovers and proxy fights filled the air, Disney was forced to respond. In its 2002 annual report, Disney listed the following corporate governance changes:

• Required at least two executive sessions of the board, without the CEO or other members of management present, each year.

30 Bhide, A., 1989, The Causes and Consequences of Hostile Takeovers, Journal of Applied Corporate Finance, v2, 36-59.

• Created the position of non-management presiding director, and appointed Senator George Mitchell to lead those executive sessions and assist in setting the work agenda of the board.

• Adopted a new and more rigorous definition of director independence.

• Required that a substantial majority of the board be comprised of directors meeting the new independence standards.

• Provided for a reduction in committee size and the rotation of committee and chairmanship assignments among independent directors.

• Added new provisions for management succession planning and evaluations of both management and board performance

• Provided for enhanced continuing education and training for board members. What changed between 1997 and 2002? While we can point to an overall shift in the market towards stronger corporate governance, the biggest factor was poor stock price performance. The truth is that stockholders are often willing to overlook poor corporate governance and dictatorial CEOs if stock prices are going up but are less tolerant when stock prices decrease.

Towards the end of 2003, Roy Disney and Stanley Gold resigned from Disney's board of directors, complaining both about the failures of Michael Eisner and his autocratic style.31 When the board of directors announced early in 2004 that Michael Eisner would receive a $6.25 million bonus for his performance in 2003, some institutional investors voiced their opposition. Soon after, Comcast announced a hostile acquisition bid for Disney. At Disney's annual meeting in February 2004, Disney and Gold raised their concerns about Eisner's management style and the still-captive board of directors and 43% of the stockholders voted against Eisner as director at the meeting. In a sense, the stars were lining up for the perfect corporate governance storm at Disney, with Eisner in the eye of the storm. Soon after the meeting, Disney announced that Eisner would step down as chairman of the board even though he would continue as CEO until his term expired in 2006.

31 You can read Roy Disney's letter of resignation on the web site for the book.

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