Finance

According to BPP (2008), In the world of mergers, acquisitions and corporate raiding,  Green mail  or  Green Mailing  constitutes a tactic whereby a  corporate raider purchases a significant amount of shares of a public company and threatens a takeover or change in management or constitution of the company itself , hence forcing management to buy back his shares at a premium to avoid such an eventuality (P.256). The Walt Disney Productions Case deals with this concept and examines the use of this tactic by Saul Steinberg in his attempted takeover bid for Walt Disney Productions and the options available to the management of the threatened company in response to this green mailing exercise.

Whether Walt Disney Productions should accept or reject this green mail knocking on their door step depends to a large degree on the financial and business premise of the company and its core operations. Financial and business viability of the company is important as it helps in the derivation of any excess value over and above the public tender offer made by Steinberg. According to FTC (2008), It is pertinent to mention here that  management owes a fiduciary duty to shareholders  implying that they have to act in the best interests of shareholders by maximizing shareholder wealth (P.51). Hence, from a purely financial management perspective, the greenmail should only be accepted if the management feels that they can create more value for shareholders by retaining the firm instead of agreeing to the looming takeover. The point concerning the fiduciary duty of management to shareholders also puts things in an ethical perspective. It is important for management to not look after their jobs and put shareholder interests above their own.

The relative benefits and costs of such a defensive tactic on shareholder value also have to be considered. According to Engle (2007),  greenmail payments drive down stock values  as free cash flows that could have been used elsewhere in making more profitable investments are used in unproductive processes and hence reduce future earning capacity (P. 1). On the other hand, benefits of accepting the greenmail can only accrue provided that management can still create excess value in the long run as stated above.

Lastly, there is also the larger issue of agreeing to a price tag for the greenmail.  Theoretically speaking, unless and until the corporate raider has a fair valuation for the target firm, management cannot realistically arrive at a price tag for their  greed. At the same time, the cost of resisting the greenmail payment and seeking other defensive tactics has to be factored in. According to Schweser (2008),  The greenmail payment should not be larger then the cost of resisting the greenmail payment through other defensive mechanisms  (P. 71).

Putting the above in perspective, it is evident that Disneys business and financial premise has been weakened lately with poor management reflective in every aspect. Starting with the over indulgence in Walt Disneys personality cult, poor financial and business appraisal of available opportunities (as represented by the over indulgence in real estate and theme park development), lack of replacement projects for projects approaching expiry (as evident by the non replacement of the TV Series on CBS), poor performance of studio produced films and animations on the Box Office and the lack of response depicted by the company to systematic factors (like the aging of the American population). All these are representative of poor management and point to significant costs to be borne by the shareholders going forward in the shape of a management change and costs of business reorganization if shareholder value is to increase.

Having said the above, that unless a viable turnaround strategy is put in place the financial and business premise of retaining the company is not good enough for existing shareholders, it is safe to say that any green mail payment will further depress shareholder value and the realization of any excess value over and above what Steinberg is offering will become a matter of immense speculation.

Lastly, the expense of 510 million by Walt Disney in acquiring two other firms has not deterred Steinberg who has only raised his offer consequentially for the company. This represents the fact that the greed element in Steinberg and his determination exceed any fair valuation for the company and hence any greenmail payment will have to be quite hefty to make him go away.

The merited conclusion of the theoretical framework and its application on this case is that the green mail payment should not be made as this only benefits the current management who has had a poor track record of managing shareholder investments as represented by the recent downturn in the companys fortunes. The determination of Steinberg makes the price tag on a greenmail payment large enough to further erode value. Hence, management should act in the best interests of shareholders and not resist this takeover, thus, allowing existing shareholders to sell their holdings at a premium price and hence maximize their wealth.