The deal of the Century? Or is it a Trap?

On 14^th of December 2017, a huge landmark deal come in to place; Disney acquiring 21^st century fox assets for $52.4 billion in cash and stock, with the objective of launching streaming services. Not only that, personally it signify that Disney will gain the privilege of investing and controlling 21^st century fox entertainment assets based on X Men and Fantastic 4 Intellectual Properties to enter the Marvel family, allowing Disney to launch new moves based on those brands which will increase Disney’s revenues because who doesn’t like to pay and watch new Marvel movies because it is iconic and fans will always craving more on those movies and will subscribe to Disney streaming media if it is available.  

Focusing on Merging and Acquisition theory, well it’s all about synergies and takeover cases. Such as in 2018 Disney values 21^st Century Fox for $71.3 billion and I am confuse on how they manage to value that much for a company that currently have $34 billion in Net Asset Valuation. Personally the reason is that, one, Comcast is a competitor in this takeover market where they bid $65 billion which Disney is force to bid higher and that signify the aggressive performance by Disney to demand in 21^st century fox assets because in the financial manager perspective it provides sufficient future cash flows and they see the benefit of using 21^st Fox asset to launch online streaming and new movies by IP investment. Which will resulted to positive net discounted cash flow, and since Disney WACC is 8.5% which may provide high Net Present Value reaching more than $2 billion, compare to Netflix WACC is 10.5% and Netflix is the main competitor in streaming media which seemingly signify that Disney is in great advantage. 

However, is it smooth sailing for Disney because they demand so much? Recently, 21^st century Fox shareholders compile a lawsuits to Disney because of proxy battle in takeover and insufficient disclosures, which should damage Disney’s goal. There were speculative debates in this acquisition, such as 21st century Fox actually wants Comcast to takeover symbolizes as the white knight, however Disney move in, to be involve in the bidding war which the shareholder provide lawsuit. 

However, the lawsuits was terminated and Disney is doing well, such that its share price increases from $27.18 to $45.83, which is not accordance to Efficient Market Hypothesis, because this is a bad news to Disney, lawsuit can damage reputation and acquisition can damage the company’s liquidity to have high cash outflow and not have cash at all, however the share price increase which is confusing.

I think the reason is that shareholders and investors believe in Disney’s takeover can be successful, that’s my perspective as well in the long run, because synergy between Disney and 21st Century Fox is high and greatly increasing from 2.04% to 19.1% signifying present value for both companies will have sufficient cash inflow and gains from additional resources and excess income. 

Or... is there another reason.......? Disney is known to have many conspiracies and confusing sites, such as showing hidden adultery and sinister content to children even in cartoons, or in financial term they are accused to perform insider trading, financial reporting manipulation and the current takeover project which they were accused for proxy battle, however they often get away from these accusation easily.

To be honest, with all of this information, I am persuaded to invest in Disney blue chip stocks, because the company is considered a safe valuable investment and have a managerial strategy to get away from every issues, and I’m curious on how they execute those strategies. From the research of Disney’s and 21^st century fox business model and takeover project, I believe that both companies will enrich future business benchmark because with Disney management it will amplify and develop 21^st Century Fox Asset and entertainment department to be more efficient, flexible and effective to enrich business goals and profitability’s. Furthermore, I believe this will strengthen shareholder wealth with high increases of share prices and continues dividend return payment will provide liquidity and cash for shareholder to continuously increase their income and ownership of asset because from Disney never ending business growth. 

However, I’m still confuse on the function of Disney share price to increase, as I questioned myself that, is the reason of rising share price interrelated with proxy battle? Because if it is, this may lead to one trading strategies where many investors decided to invest in a struggling company or a company that experience decrease in share price, and when they invest all together the share price sharply increase, which persuaded other investors to invest. Then, after that share price increases so much, those pool of investors or speculators will sell, gaining a capital gain and win the speculation game, signifying a zero sum game because those investors whom are not aware will obtain a negative abnormal return, this is called market manipulation by rouge traders.

So it made me question my claims as a risk averse investor; will the company survive the high cash outflow after the acquisition? Are the intention of Disney’s shareholders and investor based on market manipulation or long term business benchmark? This is why financial ethics and corporate governance is still struggling to be effective, even in the 21^st century, so called golden era.