Tuesday, December 27, 2016

Minority Shareholders Wise Up In 2016

Don’t like the controlling shareholder? Great! There are thousands of firms you can invest in instead.


By Holman W. Jenkins, Jr.
The Wall Street Journal
December 27, 2016

“There ought to be a law” is always somebody’s idea of a solution when corporate governance problems crop up. It’s usually a bad idea, even with the past year’s excess supply of aggrieved minority shareholders.

The great virtue of our corporate system is that investors have thousands of companies to choose from. If a company’s governance or ownership structure aren’t what you think they should be, don’t buy its shares. Caveat emptor, in most cases, is a better regulator than any regulator.

That’s true even in a case like Viacom’s, where the problem was a prolonged squabble over a successor to a possibly incapacitated controlling shareholder. Sumner Redstone, the aged founder, had every incentive to avoid such a problem in the first place. He didn’t. And as uncertainty over his leadership dragged out, Viacom failed to adapt its mediocre and dispensable cable TV networks to the digital age.

Now his daughter, Shari Redstone, is in charge. Shareholders of CBS, another company in which she has an influential stake, have lately worried about being railroaded into a merger with Viacom to suit Ms. Redstone.

To those who say law and regulation should provide a solution, there is one: It’s called steering clear of companies with controlling shareholders if you don’t like the risk.

This applies also to Michael Dell of Dell Computer, whose 2013 management buyout left many shareholders feeling shortchanged. This year he lost a mostly symbolic shareholder lawsuit on the matter, but the case also reaffirmed our basic judgment at the time: Mr. Dell legitimately had his shareholders over a barrel.

Another buyer could have offered a higher price, but Carl Icahn, Mr. Dell’s chief critic, didn’t and neither did anyone else. Maybe potential buyers feared that outbidding a charismatic founder would win them a demoralized and devalued company. Who knows? But it’s not obvious what the solution would be except for investors to be careful when getting in bed with a charismatic founder in the first place.

Shareholders of Tesla last month didn’t like their money being used to bail out another Elon Musk-backed company, Solar City. But Tesla’s share value inordinately depends on Mr. Musk’s reputation as a genius and capitalist conjurer. Now those investors who bought into this story were being asked to chip in for Solar City if that’s what it takes to maintain the Musk bubble. We’d say that’s their lookout.

Ditto a recent lawsuit charging that Facebook founder Mark Zuckerberg was improperly coached when cajoling his board this year to let him maintain voting control as he sells shares to fund his philanthropic efforts. So what? Mr. Zuckerberg already has control so never was going to settle for any terms that don’t leave him in control.

Less easy to justify is expecting shareholders to stomach certain terms struck by CEO Jeffrey Katzenberg in April when he sold DreamWorks Animation to Comcast. He reserved for himself a continuing ownership stake in certain DreamWorks digital ventures. Understandably, in a pending lawsuit, shareholders say they should be compensated for the market value of these rights.

Which brings us to the most uproarious case of all. A declining newspaper industry increasingly makes it affordable for millionaires to strut like billionaires, at least in their hometowns. A one-time dot-com wunderkind, Michael Ferro, put up $44 million in February to buy a controlling stake in the Tribune Co., which owns his hometown Chicago Tribune as well as the attractively Hollywood-adjacent Los Angeles Times.

Almost no sooner than he took control, he found himself fighting a takeover offer from newspaper giant Gannett at a price indisputably alluring to his minority shareholders—63% above the then-market price. But as Gannett tells it, Mr. Ferro saw his dreams of playing kingpin threatened and declined to consider a sale unless he was offered a “piece of the action.” At least that’s what Gannett publicly charges.

Some bits of advice become clich├ęs because they have to be repeated over and over: Trust but verify. Fool me twice, shame on me. These are elements of eternal wisdom that investors can console themselves with when they get on the wrong side of highhanded controlling shareholders.


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