Revolving-Door Capitalists
“You can observe a lot just by watching.”
- Yogi Berra
In October 2020, hedge fund manager Dan Loeb sent a letter to Bob Chapek, the CEO of The Walt Disney Company. In the letter, which was penned to “express appreciation” for Disney’s increased focus on its DTC businesses, Loeb wrote the following (bold added for emphasis): “We understand that a more aggressive investment strategy may pressure short-term earnings on the path to creating long-term value. Lest there be reservation about making such a trade-off and any potential shareholder concerns, we highlight an observation from Warren Buffett: ‘Companies get the shareholders they deserve.’ Disney deserves growth-minded, long-term oriented investors, and we believe that a strategy centered around using Disney’s many resources to drive growth in the DTC business will further attract them.”
While Loeb implored Disney management to seek out the “long-term oriented investors” that they deserved, his actions should make one question whether he belongs in that group; less than 18 months after that letter was sent to Chapek, Third Point had liquidated its position in Disney. Fast forward to August 2022, when Third Point disclosed that it had once again invested in The Walt Disney Company. In addition, Loeb sent another letter to Chapek with a list of key strategic and financial changes that he would like to see implemented (and which would meaningfully impact the long-term value and direction of the business, as I’ll discuss momentarily). As a long-term Disney shareholder, I think this situation demands a thoughtful response (words and actions) from management; importantly, misplaying their hand here could derail much of what they’ve worked to build over the past five-plus years.
First, it should go without saying that Loeb’s ideas may be valid and are worth exploring; management should give them their proper consideration with respect to the fiduciary responsibility it has to the long-term owners of the business. That said, management should also ask themselves whether the requests of an activist investor (trader) are truly aligned with the long-term interest of the business and its shareholders. His ideas should be reviewed solely against the relevant test (its impact on long-term value creation).
On that point, if Loeb truly believes that his proposed solutions are additive to the long-term value of the enterprise - as one piece or the sum of its separate parts - I think it would be beneficial to his position if he committed to eating his own cooking (to the extent that he cares about garnering the support of Disney owners, like myself, who may be skeptical of his intentions given how he’s acted previously). Specifically, it would greatly increase my willingness to trust Loeb if he publicly committed to maintaining his stake in Disney for a period of time - say, the next three years - if his proposed solutions were applied (including in any new entities to be created as a result of a spin-off).
For what it’s worth, there is a historic precedent for acting in this manner; as a matter of fact, we’ve seen a few prominent examples from the man that Loeb quoted in his first letter to Chapek: Warren Buffett. Consider what Buffett wrote about his investment in Cap Cities in the 1985 shareholder letter:
“As evidence of our confidence [in Cap Cities], we have executed an unusual agreement: for an extended period Tom, as CEO (or Dan, should he be CEO) votes our stock. This arrangement was initiated by Charlie and me, not by Tom. We also have restricted ourselves in various ways regarding sale of our shares… Some might think we’ve injured Berkshire financially by creating such restrictions. Our view is just the opposite. We feel the long-term economic prospects for these businesses - and, thus, for ourselves as owners - are enhanced by the arrangements. With them in place, the first-class managers with whom we have aligned ourselves can focus their efforts entirely upon running the businesses and maximizing long-term values. Certainly this is much better than having those managers distracted by “revolving-door capitalists” hoping to put the company “in play”… By circumscribing our blocks of stock as we often do, we intend to promote stability where it otherwise might be lacking. That kind of certainty, combined with a good manager and a good business, provides excellent soil for a rich financial harvest. That’s the economic case for our arrangements.”
In summary, I think it would behoove Loeb to consider copying Buffett on his Disney investment if he’s willing to think and act like a long-term owner and if he truly believes that his ideas are additive to the long-term value of Disney. Personally, I think those are two big if’s. I have no real knowledge on Loeb’s willingness to own a stock for the long-term, so I’ll focus my time on the second question: are his proposed changes likely to meaningfully improve Disney’s competitive position(s) and the long-term value of the enterprise?
The Future of ESPN
I want to specifically focus on Loeb’s fourth suggestion, which would have significant strategic and financial implications for Disney: spin-off ESPN.