Comic Fodder

Disney/Marvel Merger Lawsuit Madness!

It only took a few days for the ambulance chasers to try to sabotage Disney's plans to buy Marvel Entertainment. Isn't it lovely to know that in today's world of free-market capitalism, when two parties mutually agree to a deal where everyone will benefit, other people still think it's their business to barge in and say, "Oh no you can't!" The first law firm, Levi & Korsinky, actually wants the government to bar the deal AND pay damages! Join me as we dissect the claims.

The first plaintiff is a shareholder of Marvel stock, Christine Vlatos, but the law firm has made it a class-action lawsuit, and has a webpage to allow any other interested shareholder to sign up and join in the lawsuit. That lawsuit was filed on September 1, while the Shareholders Foundation, Inc. firm was announced later, "on behalf of current investors, "but they did not identify their primary plaintiff. They will also accept you as part of the lawsuit if you were a shareholder.

Here's the full quote via from Vlatos' complaint: "The proposed transaction does not appear to adequately value Marvel's shares or serve the best interests of the company's public shareholders," read the complaint, which names Disney as a defendant. "Disney, with the board's complicity, appears to have capitalized on non-public information about Marvel in offering to acquire the company."

Basically what the two lawsuits are saying is that since Marvel is a public company, the executives have a fiduciary duty to get the highest possible price if they ever sell the company. That's fine as far as it goes, but the law does not require you to be successful in your attempt get the best price, only that you make a responsible attempt in the first place (Ashby Jones brings this up the Revlon court case in the Wall Street Journal blog that covers this). This can be very important if a company is in trouble and another one wants to do a corporate takeover. The existing shareholders of the target are well-advised to make any corporate raider pay dearly,
and squeeze out the most they can. This deal is a little different.

The idea of a merger started with Disney, which was flush with cash, and has made a number of buyouts, adding to their entertainment empire the last few years. Their execs were looking around for more good prospects, and landed on Marvel. They went to Ike Perlmutter, Marvel's Chief Executive Officer, told him straight up they were interested to buy, and sat down with him for lunch. Perlmutter definitely has an interest in hanging around; he really likes the company and what he's doing. All Disney had to do was reassure him that he could keep running his part of the show, and then they started talking about the ways the two companies could help each other out if they were under one roof. Perlmutter is no fool, and it was always in the cards for him to sell the company at some point. The law representatives worked out the terms and came to an agreement.

The key is that this was not a distressed purchase. Perlmutter didn't go hat-in-hand to Disney and ask for help. Disney isn't some pirate on the high seas of entertainment companies, plundering hapless smaller fish. These are some business-minded people who saw a good fit, made an offer, and Marvel looked at it and declared it was good. In that context, the deal still has to be good enough to meet fiduciary responsibility, so that leads us to the next question: was this deal in the reasonable ballpark of "the best deal?"

Marvel was actually in bankruptcy a few years back, and they crawled their way out of that mess with a new plan to make their own movies. That success has led to their stock ramping up from $18 two years back to a share to $38 before the merger announcement. In one of my columns, I suggested there were good days ahead for the stock, and cited a bunch of other analysts who were also recommending long-term holds for the stock. We expected great success from the company's future endeavors, and I was planning to hold onto it for two more years, hoping for another $10-12 of gain.

Christmas came early.

Wall Street was certainly aflutter with excitement when news of the deal was first announced. Sites like declared that Marvel was getting a nice deal, and "the buyer is paying top dollar." There are three things to look at when assessing the proper context for what constitutes a good deal, and we'll examine those here.

The first thing to look at is the big picture: how is the overall economy doing? Well, the stock market tanked, the housing bubble burst, and America entered a recession, causing economic waves worldwide. Marvel stock rose through all of that. That's one indicator you've got a good thing going. Since approximately three-fourths of all stocks follow the general direction of the Dow, a rising stock price when everyone else is in the dumper indicates you have a strong performer.

The second thing to look at is a term called Ebitda, or Earnings Before Interest, Taxes, Depreciation and Amortization. It is the most common measure used to determine the value of a company. It is confused with cash flow way too often, but what it really gives you is the overall amount of money a company makes before it has to pay all its bills, like loans and payroll. Companies in trouble like to use their Ebitda number to mask their debt troubles and make the company look more attractive. Whereas cash flow can give you a good idea of how much cash the company retains after they pay their bills each year, the reason Ebitda is used more than pure cash flow is that the Ebitda numbers can provide an indication of future potential profitability, which is what will really help Disney.

According to the Deal's article, Lazard Capital Markets "put the deal at 12 times 2010 Ebitda, or a more modest multiple of 10 times Marvel's 2012 Ebitda... The price is significantly above the valuations assigned to Disney and other media conglomerates." That's a nice premium, and it matches my sunny expectations of Marvel's success, and shows that the Disney execs feel the same way. By definition, paying a premium means you're offering more than what the company is worth on face value. If someone ordinarily wouldn't want to sell (like Perlmutter), you actually have to pay a premium, to convince him to do something he normally wouldn't do. That means the presence of a premium alone doesn't automatically constitute proof of a "best deal," but it is a good sign when the premium is 30%!

The third thing to look at is this: what exactly will Disney be getting out of the deal? When we look at all of the possibilities, it turns out that this absolutely has to be a long-term business proposition, because all of the cool stuff going on in the short-term with Marvel is already spoken for by other companies. All of the major characters that have movies coming out are already tied up in existing distribution deals. Deadline Hollywood (DH) has a nice breakdown that describes all of the other agreements in existence that are tying up any play Disney might have made for toys, video games, even theme parks.

The movies are the worst. Paramount has the deal to distribute the biggest characters: Iron Man 2 & 3, Captain America, Thor, and the Avengers. Sony has already green-lighted another trilogy of Spider-Man movies, and Fox will be developing as many mutant movies as they can to hold onto the X-Men and the rights of all of those related characters, including Wolverine, Magneto, Gambit and Deadpool. What DH doesn’t mention is that Fox also has the rights to Daredevil, Elektra, and the Fantastic Four. And wouldn’t you know it, Fox has already announced that they will be doing a reboot of the FF! (One thing that people are tip-toeing around, for some reason, is that most of the original FF cast will not be coming back.)

This is part of the reason that the lawsuits may run into trouble. As long as a movie studio continues to develop the property and produce new films, they usually get to keep the movie rights for an extended length of time; it can be years, or indefinite, depending on how each contract was written up. But since super-hero movies have been proven to have so much potential, you can bet every dollar you have that Fox and Sony are going to milk their movie rights for as long as humanly possible, and that will mean that Fox should kick-start their Silver Surfer movie before too much longer as well. All of this added up means that Disney can’t leverage their ability as a movie distributor to take in the other half of box office receipts for all of these movies. Marvel will get their share, and that will add to Disney’s bottom line now, but because Marvel had no merger plans before this, they were making a lot of long-term deals with other good companies to achieve their goals. That means that more than two billion dollars worth of box office receipts will go to other companies than Disney over the next decade. Ouch!

But wait, there's more! According to icv2, there is a "poison pill" in the Disney/Marvel merger agreement: if the deal fails, Marvel has to pay a penalty, a $140 million termination fee. As a cell phone customer, you might be familiar with the early termination fee you are charged if you break your phone contract before the full term is up. In the case of big companies, the termination fee is supposed to offset any costs that Disney incurs. In other words, Disney is putting out a lot of time and effort and billable hours to lawyers to make this deal happen, and the termination fee makes sure they don't waste millions in acquisition fees for nothing.

The flip side of this type of fee is that the shareholders of a target company like to argue that it is simply a poison pill to prevent a company from shopping around to find a better price. They kind of leave out the fact that Marvel wasn't hurting, and wasn't actually looking around in the first place for suitors, but that may be irrelevant for this matter. There are studies that have examined fees like this to determine the truth of the matter. More than One study concluded they weren't poison, but were appropriate for these high-stakes, multi-billion dollar deals to help their success when there is a possibility that the bid might fail. Lest you think I'm cherry-picking the studies, the next one I found supported the same conclusion, and so did the third study. If the Disney and Marvel lawyers are anywhere near competent, they will be able to dismiss this objection to their merger with ease.

The main thrust of the case against the deal seems to be that Disney made an offer to buy the company during 2009, a year when no movie came out. They want to suggest that since movies are an increasing part of Marvel’s income stream and profit, it is unfair to buy them based on their current stock market price, since they will be worth more when the market reflects the earnings from their movies in 2010 or 2011.

This is second-grader reasoning. Remember that column I referred to above, the one I wrote about how great Marvel was, and how good the future looked for the stock? Before there was even a whisper of a lawsuit, I pointed out that Marvel would be like Pixar, in the sense that the value of their stock would fluctuate depending on their movie schedule. They have dry spells, and their stock price accurately reflects their value at that moment in time. If I wanted to live in Lawyer Dreamland (hey, that sounds like a new Disney show!), I could argue for almost any stock I picked that it had made more money in the past, and would make umpteen-billions in the future, so of course the current offer to buy it is waaay too low! And then I would be spanked and sent to my room.

In the long term, the deal makes sense for Disney. Even though the most popular and obvious characters are tied up, a library of 7,000+ characters presents a lot of depth to mine. With all of the TV, animation movies, cartoon and video game formats Disney can readily deploy, there are a ton of ways that different characters could be utilized. While the premium makes sense, and it will take a while to get everything organize under just the one roof, the ultimate goal is worth their while, and these executives are thinking in terms of twenty to thirty years, not some short-sighted five-year plan. Most of the financial commentary I have seen leaned toward the idea that Marvel was getting a good deal, so the plaintiffs have their work cut out for them to persuade the court otherwise.

I’m not sure how this little fact will factor in, but the market had Marvel valued at around $38 a share one Monday morning. When the Disney offer to buy Marvel became public, Marvel’s stock shot up almost $10. That’s ten bucks for every share of Marvel you were holding. If you had 1,000 shares, that means you just made $10,000! In one day!! Does that sound like the shareholders have suffered under this offer? I say thee nay!

P.S. Probably no comic reviews from me this weekend, I’m going out of town.

P.P.S. Let me know if an article like this is too long to read in one sitting, and you would prefer to see it broken into two segments.

Tpull is Travis Pullen. He started reading comics at 5 years old, and he can't seem to stop.