Case 3: Cross and Pyramid Holdings Tata Motor s top...
Transcript of Case 3: Cross and Pyramid Holdings Tata Motor s top...
![Page 1: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/1.jpg)
28
Case3:CrossandPyramidHoldingsTataMotor’stopstockholdersin2013
Aswath Damodaran
![Page 2: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/2.jpg)
29
Case4:LegalrightsandCorporateStructures:Baidu¨ TheBoard:Thecompanyhassixdirectors,oneofwhomisRobinLi,
whoisthefounder/CEOofBaidu.Mr.LialsoownsamajoritystakeofClassBshares,whichhavetenNmesthevoNngrightsofClassAshares,granNnghimeffecNvecontrolofthecompany.
¨ Thestructure:BaiduisaChinesecompany,butitisincorporatedintheCaymanIslands,itsprimarystocklisNngisontheNASDAQandthelistedcompanyisstructuredasashellcompany,togetaroundChinesegovernmentrestricNonsofforeigninvestorsholdingsharesinChinesecorporaNons.
¨ Thelegalsystem:Baidu’soperaNngcounterpartinChinaisstructuredasaVariableInterestEnNty(VIE),anditisunclearhowmuchlegalpowertheshareholdersintheshellcompanyhavetoenforcechangesattheVIE.
Aswath Damodaran
![Page 3: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/3.jpg)
30
Thingschange..Disney’stopstockholdersin2009
AswathDamodaran
30
![Page 4: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/4.jpg)
31
II.Stockholders'objecNvesvs.Bondholders'objecNves
AswathDamodaran
31
¨ Intheory:thereisnoconflictofinterestsbetweenstockholdersandbondholders.
¨ Inprac3ce:StockholderandbondholdershavedifferentobjecNves.Bondholdersareconcernedmostaboutsafetyandensuringthattheygetpaidtheirclaims.StockholdersaremorelikelytothinkaboutupsidepotenNal
![Page 5: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/5.jpg)
32
Examplesoftheconflict..
AswathDamodaran
32
¨ Adividend/buybacksurge:Whenfirmspaycashoutasdividends,lenderstothefirmarehurtandstockholdersmaybehelped.Thisisbecausethefirmbecomesriskierwithoutthecash.
¨ Riskshi^ing:Whenafirmtakesriskierprojectsthanthoseagreedtoattheoutset,lendersarehurt.LendersbaseinterestratesontheirpercepNonsofhowriskyafirm’sinvestmentsare.Ifstockholdersthentakeonriskierinvestments,lenderswillbehurt.
¨ Borrowingmoreonthesameassets:Iflendersdonotprotectthemselves,afirmcanborrowmoremoneyandmakeallexisNnglendersworseoff.
![Page 6: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/6.jpg)
33
AnExtremeExample:UnprotectedLenders?
AswathDamodaran
33
![Page 7: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/7.jpg)
34
III.FirmsandFinancialMarkets
AswathDamodaran
34
¨ Intheory:Financialmarketsareefficient.ManagersconveyinformaNonhonestlyandandinaNmelymannertofinancialmarkets,andfinancialmarketsmakereasonedjudgmentsoftheeffectsofthisinformaNonon'truevalue'.Asaconsequence-¤ Acompanythatinvestsingoodlongtermprojectswillberewarded.
¤ ShorttermaccounNnggimmickswillnotleadtoincreasesinmarketvalue.
¤ Stockpriceperformanceisagoodmeasureofcompanyperformance.
¨ InpracNce:Therearesomeholesinthe'EfficientMarkets'assumpNon.
![Page 8: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/8.jpg)
35
ManagerscontrolthereleaseofinformaNontothegeneralpublic
AswathDamodaran
35
¨ InformaNonmanagement(Nmingandspin):InformaNon(especiallynegaNve)issomeNmessuppressedordelayedbymanagersseekingabeeerNmetoreleaseit.WhentheinformaNonisreleased,firmsfindwaysto“spin”or“frame”ittoputthemselvesinthebestpossiblelight.
¨ Outrightfraud:Insomecases,firmsreleaseintenNonallymisleadinginformaNonabouttheircurrentcondiNonsandfutureprospectstofinancialmarkets.
![Page 9: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/9.jpg)
36
Evidencethatmanagersdelaybadnews?
AswathDamodaran
36
DO MANAGERS DELAY BAD NEWS?: EPS and DPS Changes- byWeekday
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Monday Tuesday Wednesday Thursday F r i d a y
% Chg(EPS) % Chg(DPS)
![Page 10: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/10.jpg)
37
SomecriNquesofmarketefficiency..
AswathDamodaran
37
¨ InvestorirraNonality:ThebaseargumentisthatinvestorsareirraNonalandpriceso^enmovefornotreasonatall.Asaconsequence,pricesaremuchmorevolaNlethanjusNfiedbytheunderlyingfundamentals.EarningsanddividendsaremuchlessvolaNlethanstockprices.
¨ ManifestaNonsofirraNonality¨ ReacNontonews:Somebelievethatinvestorsoverreactto
news,bothgoodandbad.OthersbelievethatinvestorssomeNmesunderreacttobignewsstories.
¨ Aninsiderconspiracy:Financialmarketsaremanipulatedbyinsiders;PricesdonothaveanyrelaNonshiptovalue.
¨ Shorttermism:Investorsareshort-sighted,anddonotconsiderthelong-termimplicaNonsofacNonstakenbythefirm
![Page 11: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/11.jpg)
38
Aremarketsshortsightedandtoofocusedonthenearterm?Whatdoyouthink?
AswathDamodaran
38
¨ Focusingonmarketpriceswillleadcompaniestowardsshorttermdecisionsattheexpenseoflongtermvalue.a. Iagreewiththestatementb. Idonotagreewiththisstatement
¨ Allowingmanagerstomakedecisionswithouthavingtoworryabouttheeffectonmarketpriceswillleadtobeeerlongtermdecisions.a. Iagreewiththisstatementb. Idonotagreewiththisstatement
¨ Neithermanagersnormarketsaretrustworthy.RegulaNons/lawsshouldbewrieenthatforcefirmstomakelongtermdecisions.a. Iagreewiththisstatementb. Idonotagreewiththisstatement
![Page 12: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/12.jpg)
39
Aremarketsshortterm?Someevidencethattheyarenot..
AswathDamodaran
39
¨ Valueofyoungfirms:Therearehundredsofstart-upandsmallfirms,withnoearningsexpectedinthenearfuture,thatraisemoneyonfinancialmarkets.Whywouldamyopicmarketthatcaresonlyaboutshorttermearningsaeachhighpricestothesefirms?
¨ CurrentearningsvsFuturegrowth:Iftheevidencesuggestsanything,itisthatmarketsdonotvaluecurrentearningsandcashflowsenoughandvaluefutureearningsandcashflowstoomuch.A^erall,studiessuggestthatlowPEstocksareunderpricedrelaNvetohighPEstocks
¨ MarketreacNontoinvestments:ThemarketresponsetoresearchanddevelopmentandinvestmentexpendituresisgenerallyposiNve.
![Page 13: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/13.jpg)
40
Ifmarketsaresoshortterm,whydotheyreacttobiginvestments(thatpotenNallylowershorttermearnings)soposiNvely?
AswathDamodaran
40
![Page 14: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/14.jpg)
41
Butwhataboutmarketcrises?
AswathDamodaran
41
¨ Marketsaretheproblem:ManycriNcsofmarketspointtomarketbubblesandcrisesasevidencethatmarketsdonotwork.Forinstance,themarketturmoilbetweenSeptemberandDecember2008ispointedtoasbackingforthestatementthatfreemarketsarethesourceoftheproblemandnotthesoluNon.
¨ Thecounter:Therearetwocounterargumentsthatcanbeoffered:¤ Theeventsofthelastquarterof2008illustratethatwearemore
dependentonfuncNoning,liquidmarkets,withrisktakinginvestors,thaneverbeforeinhistory.Aswesaw,nogovernmentorotherenNty(bank,Buffee)isbigenoughtostepinandsavetheday.
¤ Thefirmsthatcausedthemarketcollapse(banks,investmentbanks)wereamongthemostregulatedbusinessesinthemarketplace.Ifanything,theirfailurescanbetracedtotheiraeemptstotakeadvantageofregulatoryloopholes(badlydesignedinsuranceprograms…capitalmeasurementsthatmissriskyassets,especiallyderivaNves)
![Page 15: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/15.jpg)
42
IV.FirmsandSociety
AswathDamodaran
42
¨ Intheory:Allcostsandbenefitsassociatedwithafirm’sdecisionscanbetracedbacktothefirm.
¨ InpracNce:Financialdecisionscancreatesocialcostsandbenefits.¤ Asocialcostorbenefitisacostorbenefitthataccruestosocietyasawholeandnottothefirmmakingthedecision.n Environmentalcosts(polluNon,healthcosts,etc..)n QualityofLife'costs(traffic,housing,safety,etc.)
¤ Examplesofsocialbenefitsinclude:n creaNngemploymentinareaswithhighunemploymentn supporNngdevelopmentininnerciNesn creaNngaccesstogoodsinareaswheresuchaccessdoesnotexist
![Page 16: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/16.jpg)
43
SocialCostsandBenefitsaredifficulttoquanNfybecause..
AswathDamodaran
43
¨ Cannotknowtheunknown:TheymightnotbeknownattheNmeofthedecision.Inotherwords,afirmmaythinkthatitisdeliveringaproductthatenhancessociety,attheNmeitdeliverstheproductbutdiscovera^erwardsthatthereareverylargecosts.(Asbestoswasawonderfulproduct,whenitwasdevised,lightandeasytoworkwith…Itisonlya^erdecadesthatthehealthconsequencescametolight)
¨ Eyesofthebeholder:Theyare‘person-specific’,sincedifferentdecisionmakerscanlookatthesamesocialcostandweightthemverydifferently.
¨ Decisionparalysis:Theycanbeparalyzingifcarriedtoextremes.
![Page 17: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/17.jpg)
44
Atestofyoursocialconsciousness:Putyourmoneywhereyoumouthis…
AswathDamodaran
44
¨ AssumethatyouworkforDisneyandthatyouhaveanopportunitytoopenastoreinaninner-cityneighborhood.Thestoreisexpectedtoloseaboutamilliondollarsayear,butitwillcreatemuch-neededemploymentinthearea,andmayhelprevitalizeit.
¨ Wouldyouopenthestore?¤ Yes¤ No
¨ Ifyes,wouldyoutellyourstockholdersandletthemvoteontheissue?¤ Yes¤ No
¨ Ifno,howwouldyourespondtoastockholderqueryonwhyyouwerenotlivinguptoyoursocialresponsibiliNes?
![Page 18: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/18.jpg)
45
Sothisiswhatcangowrong...
AswathDamodaran
45
STOCKHOLDERS
Managers puttheir interestsabove stockholders
Have little controlover managers
BONDHOLDERSLend Money
Bondholders canget ripped off
FINANCIAL MARKETS
SOCIETYManagers
Delay badnews or provide misleadinginformation
Markets makemistakes andcan over react
Significant Social Costs
Some costs cannot betraced to firm
![Page 19: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/19.jpg)
46
TradiNonalcorporatefinancialtheorybreaksdownwhen...
AswathDamodaran
46
¨ Managerialself-interest:Theinterests/objecNvesofthedecisionmakersinthefirmconflictwiththeinterestsofstockholders.
¨ Unprotecteddebtholders:Bondholders(Lenders)arenotprotectedagainstexpropriaNonbystockholders.
¨ Inefficientmarkets:Financialmarketsdonotoperateefficiently,andstockpricesdonotreflecttheunderlyingvalueofthefirm.
¨ Largesocialsidecosts:Significantsocialcostscanbecreatedasaby-productofstockpricemaximizaNon.
![Page 20: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/20.jpg)
47
WhentradiNonalcorporatefinancialtheorybreaksdown,thesoluNonis:
AswathDamodaran
47
¨ Anon-stockholderbasedgovernancesystem:Tochooseadifferentmechanismforcorporategovernance,i.e,assigntheresponsibilityformonitoringmanagerstosomeoneotherthanstockholders.
¨ AbeeerobjecNvethanmaximizingstockprices?TochooseadifferentobjecNveforthefirm.
¨ Maximizestockpricesbutminimizesidecosts:Tomaximizestockprice,butreducethepotenNalforconflictandbreakdown:¤ Makingmanagers(decisionmakers)andemployeesintostockholders¤ ProtectlendersfromexpropriaNon¤ ByprovidinginformaNonhonestlyandpromptlytofinancialmarkets¤ Minimizesocialcosts
![Page 21: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/21.jpg)
48
I.AnAlternaNveCorporateGovernanceSystem
AswathDamodaran
48
¨ GermanyandJapandevelopedadifferentmechanismforcorporategovernance,baseduponcorporatecrossholdings.¤ InGermany,thebanksformthecoreofthissystem.¤ InJapan,itisthekeiretsus¤ OtherAsiancountrieshavemodeledtheirsystema^erJapan,withfamily
companiesformingthecoreofthenewcorporatefamilies¨ Attheirbest,themostefficientfirmsinthegroupworkatbringing
thelessefficientfirmsuptopar.Theyprovideacorporatewelfaresystemthatmakesforamorestablecorporatestructure
¨ Attheirworst,theleastefficientandpoorlyrunfirmsinthegrouppulldownthemostefficientandbestrunfirmsdown.Thenatureofthecrossholdingsmakesitsverydifficultforoutsiders(includinginvestorsinthesefirms)tofigureouthowwellorbadlythegroupisdoing.
![Page 22: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/22.jpg)
49
II.ChooseaDifferentObjecNveFuncNon
AswathDamodaran
49
¨ FirmscanalwaysfocusonadifferentobjecNvefuncNon.Exampleswouldinclude¤ maximizingearnings¤ maximizingrevenues¤ maximizingfirmsize¤ maximizingmarketshare¤ maximizingEVA
¨ ThekeythingtorememberisthattheseareintermediateobjecNvefuncNons.¤ Tothedegreethattheyarecorrelatedwiththelongtermhealthandvalueofthecompany,theyworkwell.
¤ Tothedegreethattheydonot,thefirmcanendupwithadisaster
![Page 23: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/23.jpg)
50
III.MaximizeStockPrice,subjectto..
AswathDamodaran
50
¨ ThestrengthofthestockpricemaximizaNonobjecNvefuncNonisitsinternalselfcorrecNonmechanism.Excessesonanyofthelinkageslead,ifunregulated,tocounteracNonswhichreduceoreliminatetheseexcesses
¨ Inthecontextofourdiscussion,¤ managerstakingadvantageofstockholdershasledtoamuchmore
acNvemarketforcorporatecontrol.¤ stockholderstakingadvantageofbondholdershasledtobondholders
protecNngthemselvesattheNmeoftheissue.¤ firmsrevealingincorrectordelayedinformaNontomarketshasledto
marketsbecomingmore“skepNcal”and“puniNve”¤ firmscreaNngsocialcostshasledtomoreregulaNons,aswellas
investorandcustomerbacklashes.
![Page 24: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/24.jpg)
51
TheStockholderBacklash
AswathDamodaran
51
¨ AcNvistInsNtuNonalinvestorshavebecomemuchmoreacNveinmonitoringcompaniesthattheyinvestinanddemandingchangesinthewayinwhichbusinessisdone.TheyhavebeenjoinedbyprivateequityfundslikeKKRandBlackstone.
¨ AcNvistindividualslikeCarlIcahnspecializeintakinglargeposiNonsincompanieswhichtheyfeelneedtochangetheirways(Blockbuster,TimeWarner,Motorola&Apple)andpushforchange.
¨ Vocalstockholders,armedwithmoreinformaNonandnewpowers:AtannualmeeNngs,stockholdershavetakentoexpressingtheirdispleasurewithincumbentmanagementbyvoNngagainsttheircompensaNoncontractsortheirboardofdirectors
![Page 25: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/25.jpg)
52
TheHosNleAcquisiNonThreat
AswathDamodaran
52
¨ ThetypicaltargetfirminahosNletakeoverhas¤ areturnonequityalmost5%lowerthanitspeergroup¤ hadastockthathassignificantlyunderperformedthepeergroupovertheprevious2years
¤ hasmanagerswhoholdlieleornostockinthefirm¨ Inotherwords,thebestdefenseagainstahosNletakeoveristorunyourfirmwellandearngoodreturnsforyourstockholders
¨ Conversely,whenyoudonotallowhosNletakeovers,thisisthefirmthatyouaremostlikelyprotecNng(andnotawellrunorwellmanagedfirm)
![Page 26: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/26.jpg)
53
Inresponse,boardsarebecomingmoreindependent…
AswathDamodaran
53
¨ BoardshavebecomesmalleroverNme.Themediansizeofaboardofdirectorshasdecreasedfrom16to20inthe1970stobetween9and11in1998.ThesmallerboardsarelessunwieldyandmoreeffecNvethanthelargerboards.
¨ Therearefewerinsidersontheboard.Incontrasttothe6ormoreinsidersthatmanyboardshadinthe1970s,onlytwodirectorsinmostboardsin1998wereinsiders.
¨ DirectorsareincreasinglycompensatedwithstockandopNonsinthecompany,insteadofcash.In1973,only4%ofdirectorsreceivedcompensaNonintheformofstockoropNons,whereas78%didsoin1998.
¨ MoredirectorsareidenNfiedandselectedbyanominaNngcommieeeratherthanbeingchosenbytheCEOofthefirm.In1998,75%ofboardshadnominaNngcommieees;thecomparablestaNsNcin1973was2%.
![Page 27: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/27.jpg)
54
Disney:Eisner’srise&fallfromgrace
¨ InhisearlyyearsatDisney,MichaelEisnerbroughtaboutlong-delayedchangesinthecompanyandputitonthepathtobeinganentertainmentgiantthatitistoday.HissuccessallowedhimtoconsolidatepowerandtheboardsthathecreatedwereincreasinglycapNveones(seethe1997board).
¨ In1996,EisnerspearheadedthepushtobuyABCandtheboardrubberstampedhisdecision,astheyhadwithothermajordecisions.Intheyearsfollowing,thecompanyranintoproblemsbothonitsABCacquisiNonandonitsotheroperaNonsandstockholdersstartedtogetresNve,especiallyasthestockpricehalvedbetween1998and2002.
¨ In2003,RoyDisneyandStanleyGoldresignedfromtheDisneyboard,arguingagainstEisner’sautocraNcstyle.
¨ Inearly2004,ComcastmadeahosNlebidforDisneyandlaterintheyear,43%ofDisneyshareholderswithheldtheirvotesforEisner’sreelecNontotheboardofdirectors.Followingthatvote,theboardofdirectorsatDisneyvotedunanimouslytoelectGeorgeMitchellastheChairoftheboard,replacingEisner,whovowedtostayonasCEO.
Aswath Damodaran
![Page 28: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/28.jpg)
55
Eisner’sconcession:Disney’sBoardin2003
AswathDamodaran
55
Board Members OccupationReveta Bowers Head of school for the Center for Early Education,John Bryson CEO and Chairman of Con EdisonRoy Disney Head of Disney AnimationMichael Eisner CEO of DisneyJudith Estrin CEO of Packet Design (an internet company)Stanley Gold CEO of Shamrock HoldingsRobert Iger Chief Operating Officer, DisneyMonica Lozano Chief Operation Officer, La Opinion (Spanish newspaper)George Mitchell Chairman of law firm (Verner, Liipfert, et al.)Thomas S. Murphy Ex-CEO, Capital Cities ABCLeo O’Donovan Professor of Theology, Georgetown UniversitySidney Poitier Actor, Writer and DirectorRobert A.M. Stern Senior Partner of Robert A.M. Stern Architects of New YorkAndrea L. Van de Kamp Chairman of Sotheby's West CoastRaymond L. Watson Chairman of Irvine Company (a real estate corporation)Gary L. Wilson Chairman of the board, Northwest Airlines.
![Page 29: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/29.jpg)
56
ChangesincorporategovernanceatDisney
AswathDamodaran
56
1. RequiredatleasttwoexecuNvesessionsoftheboard,withouttheCEOorothermembersofmanagementpresent,eachyear.
2. CreatedtheposiNonofnon-managementpresidingdirector,andappointedSenatorGeorgeMitchelltoleadthoseexecuNvesessionsandassistinsevngtheworkagendaoftheboard.
3. AdoptedanewandmorerigorousdefiniNonofdirectorindependence.4. RequiredthatasubstanNalmajorityoftheboardbecomprisedof
directorsmeeNngthenewindependencestandards.5. ProvidedforareducNonincommieeesizeandtherotaNonof
commieeeandchairmanshipassignmentsamongindependentdirectors.
6. AddednewprovisionsformanagementsuccessionplanningandevaluaNonsofbothmanagementandboardperformance
7. ProvidedforenhancedconNnuingeducaNonandtrainingforboardmembers.
![Page 30: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/30.jpg)
57
Eisner’sexit…andanewagedawns?Disney’sboardin2008
AswathDamodaran
57
![Page 31: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/31.jpg)
58
ButasaCEO’stenurelengthens,doescorporategovernancesuffer?1. Whiletheboardsizehasstayedcompact(attwelvemembers),
therehasbeenonlyonechangesince2008,withSherylSandberg,COOofFacebook,replacingthedeceasedSteveJobs.
2. TheboardvotedreinstateIgeraschairoftheboardin2011,reversingadecisionmadetoseparatetheCEOandChairposiNonsa^ertheEisneryears.
3. In2011,IgerannouncedhisintenttostepdownasCEOin2015butDisney’sboardconvincedIgertostayonasCEOforanextrayear,forthe“thegoodofthecompany”.
4. ThereweresignsofresNvenessamongDisney’sstockholders,especiallythoseinterestedincorporategovernance.AcNvistinvestors(CalSTRS)starNngmakingnoiseandInsNtuNonalShareholderServices(ISS),whichgaugescorporategovernanceatcompanies,raisedredflagsaboutcompensaNonandboardmonitoringatDisney.
Aswath Damodaran
![Page 32: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/32.jpg)
59
WhataboutlegislaNon?
AswathDamodaran
59
¨ EverycorporatescandalcreatesimpetusforalegislaNveresponse.ThescandalsatEnronandWorldComlaidthegroundworkforSarbanes-Oxley.
¨ Youcannotlegislategoodcorporategovernance.¤ ThecostsofmeeNnglegalrequirementso^enexceedthebenefits
¤ Lawsalwayshaveunintendedconsequences¤ Ingeneral,lawstendtobeblunderbussesthatpenalizegoodcompaniesmorethantheypunishthebadcompanies.
![Page 33: Case 3: Cross and Pyramid Holdings Tata Motor s top ...people.stern.nyu.edu/adamodar/podcasts/cfUGspr16/Session4.pdf · Tata Motor’s top stockholders in 2013 Aswath Damodaran. 29](https://reader035.fdocuments.in/reader035/viewer/2022063018/5fdd61b203f9ca709672a8e8/html5/thumbnails/33.jpg)
60
Isthereapayofftobeeercorporategovernance?
AswathDamodaran
60
¨ Inthemostcomprehensivestudyoftheeffectofcorporategovernanceonvalue,agovernanceindexwascreatedforeachof1500firmsbasedupon24disNnctcorporategovernanceprovisions.¤ BuyingstocksthathadthestrongestinvestorprotecNonswhilesimultaneously
sellingshareswiththeweakestprotecNonsgeneratedanannualexcessreturnof8.5%.
¤ EveryonepointincreaseintheindextowardsfewerinvestorprotecNonsdecreasedmarketvalueby8.9%in1999
¤ FirmsthatscoredhighininvestorprotecNonsalsohadhigherprofits,highersalesgrowthandmadefeweracquisiNons.
¨ ThelinkbetweenthecomposiNonoftheboardofdirectorsandfirmvalueisweak.SmallerboardsdotendtobemoreeffecNve.
¨ Onapurelyanecdotalbasis,acommonthemeatproblemcompaniesandisanineffecNveboardthatfailstoasktoughquesNonsofanimperialCEO.