WRFH/Radio Free Hillsdale 101.7 FM - Wall Street Weekly: Buying the Board

Episode Date: April 5, 2024

What is the board of directors and why are they so important? What happens when a top-secret takeover goes terribly wrong? Join Patrick and George as they dive into these topics and much more!

Welcome to Wall Street Weekly, a show where your host, George and Patrick, cut through the financial jargon to keep you educated and informed about the markets that affect our lives. Enjoy the show. There is no other show like it, the highly informing, overperforming radio show on Radio Free Hillsdale 101.7 FM. That sounded good in my head, but I realized that there is literally hundreds of investing shows, but you, our audience, chose to tune in to us. So thank you for that. We do appreciate you all, of course. And of course, that is Patrick Scott, my co-host, and I am his co-host. He is mine. That sounded romantic. It wasn't supposed to be, but maybe a little romanticism is in the air because

we are talking about Disney, the maker of some of the most beloved and nostalgic movies of all time. But they're in the news for a different reason than Mickey Mouse or the latest animated flick. Even a different story than revenue or earnings that we have talked about in the past, as we quickly remind our audience that nothing we say on here is investment advice and is for entertainment purposes only. But Patrick told me that this story involves all out war, which is something not typical of the Disney feel-good narrative. Patrick, for more on that, I want to send it over to you. Well, business can get chippy sometimes. I don't know if I would call it all-out war, not literally anyways, but it is a proxy war. George, what's a proxy war? Well, everyone can vote on

shares. So for my understanding, it's that there's been a status quo. that's been going on for a long time. You always reelect the same directors, have business as usual, but when shareholders aren't satisfied, they try to form a coalition to take down the incumbents. So they're using the directors that they want to vote in as their proxy warriors, we'll say?

That's a good way to put it. It's like in politics you want to put someone in office if you want them to do something different. Okay. So remember that earlier episode that we talked about, we talked about hostile takeovers a few weeks ago. And hostile takeover is, if you remember, a company or an investor, they take over another company against that company's will.

And so that week, let's see, we looked at the example of InBev and Anheuser-Busch and in a few others, a few other situations. But we're seeing this play out with Disney this week. Once again, to get a more general understanding, activists investors are going to try to buy a majority share because when you have a majority share, then you can basically decide who goes on the board of directors. you have a lot of voting power. And remember that all votes are a simple majority for board of directors, that if you are able to get

50 plus 1%, as one of our professors here at Hillsdale College always likes to say, you're able to have control of the board of directors. And once you control the board, you control the entire C-suite, that's, you know, all the CEOs, CFOs, all those C-Os, and the whole company overall, really. It's a pretty powerful thing to have control of the board of directors. That's why when you want to initiate a hazyl take over, you're going to go for the board of directors, stick up the head off the snake.

And I think depending on the company, you're not going to have the ability to vote all the board of directors at one time because they have multi-year terms. But it is a good first step into saying, hey, if things don't change, we're coming for the rest of you. Yep. So let's get into the details of this proxy war that all the shareholders of Disney got tangled into.

So let's talk about the two opponents. in this matchup, the two people in the opposite corners. We have Bob Eiger on one side and Nelson Peltz on the other. Nelson Peltz is the activist investor in this scenario and he is trying to usurp the throne here from Bob Eiger. Peltz is a billionaire businessman and investor himself. He started his own alternative investment firm, which is called Tri-Anne Partners. I believe he's currently the non-executive chairman of Wendy's Cisco. That's not Cisco information systems, but S-Y-S-C-O, two different The food company. Food company, thank you. And also the Madison Square Garden Company. And Peltz has historically voted more on the right side of the political spectrum. I mentioned that for a specific

reason. We can talk about that in another moment here. As for Bob Iger, he is the incumbent CEO. He's been CEO since 2005. He's had a successful career. In the past years especially, he's come under a little bit of fire, which is why I think they're gunning for him now, Nelson Peltz, and his team. I mean, George, tell me the last really good Disney movie. You remember? I don't watch a lot of Disney, but I'll maybe say that the most recent one that I know people liked, I have two sisters and they were a big fan of Enkanto, the animated film. Enkanto?

Okay. I haven't actually seen Enkanto, so I cannot confirm nor deny that this is a good movie from Patrick's expert media perspective. But I believe the statistic, and I heard this a little while ago, so I could be wrong, something like 19 out of the 30 top Disney movies were made in 2019, and then after 2019, there were zero. We actually talked about that on the Apple and Disney show this past fall, and I think it was seven of the top 30 were in 2019,

but I think that number is closer to that 19 number when you consider the whole 2010s, and they really haven't had a hit movie in the 2020s. I don't think they've had one that's cracked the top 30, as far as revenue goes. Okay, thank you. I didn't realize that we actually mentioned that on the show, but that makes sense.

We'll go with your statistic then. As for Eiger's political leanings, he is more on the left side of things. Talking about the result of this whole battle, this war, Iger won by a substantial margin. 75% of the voting shareholders elected the incumbent board members, and Eiger is not a board member, but he is a CEO who is controlled by the board members.

and so when the takeover bid started this past January, Disney's stock price was in a trough. It had gone under some difficult times in the months leading up to January. If you look at Disney's stock chart, it had kind of tanked in that year leading up to it. But then once the takeover bid started from Nelson Peltz in January, the stock actually started trending upwards. So by the time that the case was finished, just a few days ago on April 2nd, I believe, Disney's stock price was at a 52 week that's a one-year high. And so it kind of makes sense that investors often look at the short term. So it makes sense why Nelson Peltz would start the takeover bid when he did,

but it also makes sense why he lost it ultimately. And when you say takeover, he's not trying to put people on the board who are going to buy out the company or sell the company to someone. You mean takeover that he just wants to make the company better and less focused on some of the ideology that Iger wants. So it's interesting that you bring up the ideology. That's kind of why I mentioned the political leanings of the two. So as I said, Nelson Peltz has historically been more on the right side and Igar on the left.

This is more of just speculation, but I think this could be somewhat related to the whole DeSantis versus Disney deal. I'm not sure if you've seen this in the news. It's not been super recent, but in the past few years really, DeSantis has been shooting DART at Disney for a little while now because of all of the, he would say, woke propaganda that they're producing. And so he has wanted to change that for a while. And so it's quite possible that he had some hand in Peltz's takeover bit, I think. Now, once again, that's just speculation. But it's funny to see how they're on opposite sides of the political spectrum.

Peltz is definitely aiming for those shareholders in Disney who would like to see a change. I think a lot of times we try to separate the political from the finance because that's generally good policy. However, in the case of Disney, they lost a huge tax incentive with their park in Florida. because DeSantis, I think he passed a bill so they were no longer tax exempt or there was some special status that they no longer have. And I'm not saying whether it was right or wrong for Disney not to bow to the governor of Florida. But you have to imagine that when you're operating in a state where you can get so much extra funding by doing what politicians want, that might be the good business move if you have an obligation to shareholders to maximize future value. Probably.

And I mean, I bet this is something that the higher ups in does. and you have considered for extended periods of time, who is our target audience. Now we're talking about, I guess, younger generations who might be more influenced by more modern ideology, perhaps. And so it does make sense that they would want to go with what the governor wants, but at the same time, it's like they're playing their own game, and they've been a very successful company for several decades.

So it would be hard for them to change their strategy and their outlook. And I think I also saw that they had to raise their ticket prices, which could have followed the tax increase. But apparently that is what has contributed somewhat to the higher stock price. Apparently their financials have been better recently because of those higher ticket prices. Either way, though, I think this is important if you're in the C-suite of a major company. I think that you generally want to believe that you're isolated from the pressures of the shareholders. Because so often the shares are either dispersed among so many shareholders,

they're not all going to band together and form a co-eolating. and form a coalition to out someone. But in this case, this guy, Peltz, was able to get somewhat of a critical mass that Disney felt threatened. And apparently there were actually advertisements that were targeted at shareholders, communications with shareholders, trying to encourage them to stick with Bob Eiger. So obviously they felt somewhat threatened. And you wonder if this will have any impact on the business landscape going forward.

As we continue on with our talk about Disney and now Volkswexwe. on Radio Free Hillsdale 101.7 FM. This is Wall Street Weekly. I'm George Ackler joined alongside Patrick Scott. We're talking about an event that is very big in the investing world, but I think most people on the outside probably don't know much about it. Patrick, had you heard at all about this story before I had brought it up to you? The Volkswagen story?

No. Let's just start at the end so we know what we're building up to. And that's in the fall of 2008, shares of Volkswagen more than quadrupled in the matter of two days. This may not seem extremely significant. You've probably seen some biotech stocks go up 300% because some crazy research. But you don't see it with big companies, especially not the fact that Volkswagen would end up being the biggest company in the world for a couple days in October. And how did this all happen?

Well, like many things, you have to understand where it started. And it started with Ferdinand Porsche. He was a great automobile engineer. He was actually commissioned by the Nazi government. to come up with a car, which we now know today as the Volkswagen Beetle. And he had pretty good relationships with Volkswagen, so much so that in 1948, after World War II, there was a lot of industrial capacity that didn't need to be used

because you weren't producing tanks or ammunition anymore. This meant that companies like Volkswagen had extra space in their factories, and Ferdinand Porsche designed his own car, known as the Porsche, and had it built in Volkswagen's factories. This actually isn't dissimilar from what Nvidia is doing right now where they're designing chips effectively and then using other factories to produce them for them. Does Nvidia have any of their own factories at all?

I don't believe they have any of their own factories, no. Interesting. Well, they certainly have enough capital, I would think, to build their own. Who knows, they might do that someday. Anyways, back to Porsche. Sorry. Well, Ferdinand Porsche actually isn't the most important person in the story. That would be his grandson Ferdinand Pike.

because of the maiden name thing, he has a different last name. But like father, like grandson, Ferdinand Pike was an insane engineer and businessman. He took over as CEO of Volkswagen in 1982. It was a company that hadn't been doing well, was laid in with a lot of problems, and he made it one of the best car companies in the world by the 2000s. He also had a knack for design. His car legacy includes such famous silhouettes as the portion, 9-11, the Audi Quatro, and one of the original Formula One cars.

So now you have this interesting situation where Ferdinand is running Volkswagen, even though he owns Porsche, a portion of it, 10% of it. Then you have this dude by the name of Wendellin, and he used to be on Volkswagen's board, but now he's a CEO of Porsche. So they did an old switcheroo, is what you're saying? A little bit of a switcheroo. but what this means is that these companies might want to work together. There's some interconnectedness that has remained with the companies.

Another important point of this story is that there's a shift that happens in the 2000s where to take over a company, you don't need 80%. You need 75%. That doesn't seem like a huge difference. Well, in fact, it is a major difference because there's a factory in Lower Saxony. And the government of Lower Saxony, they want to make sure that their citizens are getting employed by that factory. It's a huge economic output machine in their area. So they owned 20.1% of the shares so that it couldn't get bowed out by another entity.

The city or the region owned the? Yep, the government, the region, they own the shares, basically to protect domestic industry to make sure jobs wouldn't get outsourced where they were cheaper. People would have jobs. Okay. That's no longer the case. People can take it over. And Wendellin, CEO of Porsche, says, we're going to buy more shares in Volkswagen

because we want to be able to have closer relationships, you know, maybe share some of those synergies. This translates to he wants to buy more voting shares. There's both voting shares and non-voting shares. And he says, we're going to buy more voting shares because we want to vote in board of directors who are going to be sympathetic to Porsche and doing deals together. Now, there's an initial skyrocketing of voting shares that doesn't immediately come down.

And this confuses investor because the only difference between the voting shares and the non-voting shares is just that. One is able to vote for board of directors and one isn't. And unless someone is trying to take over the company, the shares should be within a couple percentage points of each other. To explain how crazy this ratio is, using 100 for simple math, Normally you would expect the voting shares to be at maybe $110 and the non-voting to be at $100. The non-voting were at $100 like we would expect, but the voting were at 300, just way more than made sense for it to be. And because Porsche already had a large ownership of Volkswagen, they have to disclose each time they buy a share of stock. It's just the rules, the regulations, that's what you have to do.

Now, if you're an investor, and this is what investors thought, this is a higher reward, but a low-risk play. Each day that goes by, they're checking the disclosures, and there's no news about Porsche buying more shares. Because they're not voting shares? Because they're not buying shares. Porsche at this point is not buying more shares, even though the CEO said that he wanted to. So people are confused, but they say, well, the voting shares are going to eventually plummet in value, because this guy's not taking over the company. An example I can use is it's like the running of the bulls. Though shorting is dangerous like the bulls or cattle, in theory you should be able to confidently get to safety if danger starts getting closer.

So if Porsche, even if they do aggressively start buying shares, investors should be able to get out with minimal damage. You can see it in the rearview mirror. It's pretty obvious. They're disclosing every time. You might lose a little money, but you're not going to see a game stop type short squeeze. Right. Okay. But Wendellin has a trick up his sleeve.

Basically, there's this weird thing where you don't have to disclose when you buy in the money options. If a share of Volkswagen was trading at $100, I could guarantee ownership of the stock if I made a deal with you, Patrick. So I say, Patrick, I'll pay you $96 today. $96 if you give me the opportunity to buy your share for $5 next week. And Patrick says, sweet, I get an extra dollar. just have to hold on to the volatility for a week. That's great. If I pay $100 today, I have to disclose each time I buy. If I buy a share on the open market, I have to disclose. And then people know what I'm doing. I'm showing my hand too early. But if I pay $101, I can buy all the shares I want

and delay the purchase date for all at one time. So Wendellon is paying a little bit more money so that he can just keep the secretive factor, the surprise factor? Yeah, because he knows that if he starts disclosing, oh, he's at 50% ownership. Now he's at 54. Now he's at 55. People realize, wow, he's trying to get to 75%. We can, in effect, jack up the prices of our shares because he wants to pay it. Right. And he doesn't want people to know. Gotcha. To make things simple, most investors thought there were 25 times more shares available than there actually were. Because when Wendellin disclosed on a Saturday, just so you know, I own 74% of the company.

All my options expired and I was able to buy, what would it be? 28% of the shares all at one time without anyone knowing. People were totally caught off guard and the short squeezed ensued. And just a quick reminder, a short squeeze is that shorting a stock is betting against it. If the stock is at $300, I borrow a share from Patrick, I sell it immediately, and then I have $300 cash. I expect the share to go down so I can buy it back later. and then pocket the difference. Well, it's simple supply and demand.

People thought the supply was 25 times more than it actually was. And with much less supply, the price shot up way more than people had ever anticipated. And because it's a contractual obligation, people had to buy no matter what the price, causing the stock to skyrocket four times in the matter of two days. Porsche got the last laugh. By being sneaky, they were able to acquire Volkswagen, a cheaper price than they normally would have. The end.

Except that's not what happened. In a cruel twist of fate, they were way over leveraged because they weren't able to sell cars. This was the Great Recession. Someone hadn't factored that into Wendellon's wild spending. They would end up having to sell their Volkswagen shares. And while teetering on the edge of bankruptcy, they were bought out by none other than Volkswagen. So Porsche was bought out by Volkswagen? Porsche was bought out by Volkswagen.

Okay. which is the opposite of whatever it had expected just months earlier. Wow. I don't know why I put this in there, but basically Wendellan don't feel too bad for him. He was able to cash out. And now he started his own pizza chain.

So he didn't make it in the normal car business world, but apparently he makes good pizza now. And that's the real end of the story. Now, Patrick, looking over to your side of the booth, you seem a little underwhelmed that the guy just got off Scott Free and is tossing up some Zaws now. I mean, yeah, a mediocre ending to a very interesting story. But, hey, I mean, good for him.

If pizza is really his life passion, then, you know, I say it's a win-win. I think it's pretty crazy. Just imagine you're going to a pizza parlor and a guy who caused a company to go from $125 billion to $500 billion in two days. Probably one of the biggest financial stories for an individual equity in history, for sure worldwide. And he's just chilling. In there, just making your pizzas. Yeah. Serving of the people.

Well, speaking of two stocks that have been on a wild ride, what have you thought about Trump media since our last episode? Well, dear listeners, a day, a day, right? After we recorded our last episode last Thursday, DJT tanked by, what, 25%. 25%? Yeah. 25%. So, you know, we knew we had a lot of popularity, a lot of sway in the broader

market, but we didn't know we had 25%. And we even talked about on the show how we didn't think necessarily the prospects for truth social or Donald Trump media, as it's called, were really tied to any intrinsic value. Well, they must have been to a certain extent. And I would say even more than I would have thought, because earnings came out lower than anticipated when they were first disclosed, and I think Trump himself came out and said that in the near terms, things were more disappointing than they had expected. the markets really got scared by that.

And I think it'll be interesting going forward because Donald Trump is such a big figure. We think of how Elon Musk was able to affect Tesla's stock price just by what he tweeted. Right. Him saying the stock was overvalued, the different innovations that were coming about. I think Donald Trump has the potential to do that,

but to a much higher degree. Trump media is a smaller company so it can move much easier with less of the volume being traded. and I think people somehow listen even more passionately to him than even the most ardent fans of Elon Musk. But to you are ardent fans, unfortunately, that's all the time we have for today. Tell the audience where they can find us if they enjoyed our show.

Well, the number one place to go check us out is our page on X, which is at Wall Street Pod. We also have a transistor page, and you can find us on Spotify and Apple Podcasts as well. Really, wherever you get your podcasts, we are there. And with that, we want to thank you for listening to Wall Street Weekly on Radio Free Hillsdale 101.7 FM.