During his recent interview with Tobias. Joseph Calandro Jnr discusses how investors can find value in companies with hidden assets. He illustrates the point with the case study of Disney’s purchase of Marvel for $4 Billion. Here’s an excerpt from the interview:
Tobias Carlisle: You describe in your paper as 57 percent above what the future value, the net asset value, you described as an expected growth requiring a 20 percent reinvestment rate. So can you just … How are future value and so on arrived at, and what was the plan for the expected growth?
Joseph Calandro: Yeah, no great questions. So, again, a little bit more context before I get right into the answer. I published a paper in a strategy journal, Corporate Strategy Journal, on the Marvel bankruptcy and then, literally, six months or so later Disney acquired Marvel.
Joseph Calandro: So it’s better to be lucky than smart, the editor called me and said, “Hey, can you take a look at this?” And I don’t like commenting, especially in a research journal on recent transactions, but this one was really kind of too good to pass up. And you’re right about Bob Iger, and the quote that I took in a quote in the paper is, his statement at the time was, “We paid a price that reflects the value Marvel created and the value we can create at one company. It’s a full price but a fair price.”
Joseph Calandro: So as a value oriented investor and analyst, if you paid a full price, how are you going to make money? So that was really the quote that got me interested in it and then I looked at it and I applied the value approach on top of it. And sure enough, it came to when you take it through net asset value, earnings power value, franchise value, growth value, over half of the value is locked into growth. And when you look at the reinvestment rate, it’s over 20 percent; that’s a very hard hurdle to overcome.
Joseph Calandro: So, I very rationally commented that it does not appear that there is no margin of safety in this price, it’s going to be very tough for Marvel to … excuse me, for Disney to profit from this acquisition. I was clearly very, very wrong and understanding why and how I went wrong is the topic of the current paper, which is my third on Marvel.
Tobias Carlisle: So how’d they go wrong? How did Disney go right, rather, how did they exploit those first hidden assets to, that they’ve made many times over that expected growth value that they paid?
Joseph Calandro: Yeah, it’s a great question. And the thing that struck me was when I went back, it’s like most people, I don’t like to be wrong. But unlike most people, I try to really figure out where I went wrong, why, and to learn from it. And the part about this that shocked me was is that Iger did not lie. He was, his statement he was absolutely right, he did pay a full price for Disney and a fair price, based upon the general consensus at the time; and that’s important.
Joseph Calandro: So let’s kind of go back in time, Iron Man came out, it did very, very well. It was immediately followed by the Incredible Hulk, which did not do that well; it made some money, but not a great deal of money. And even though Robert Downey had a cameo appearance at the end, the famous star of Iron Man, and now he’s one of the three key faces of the Marvel Cinematic Universe.
Joseph Calandro: It was at that point where, if you’re just focusing on the intangible assets of Marvel on a picture by picture basis, it will lead you to that $4 billion price, plus or minus depending upon how aggressive you are; but that’s where you’re going to end up. What that valuation does not consider, at all, is the value of integrated story arcs, and character team ups which is what Marvel, under the amazing leadership of Kevin Feige who, in my opinion, he is to the Marvel Cinematic Universe with the late Stan Lee was to Marvel.
Joseph Calandro: He put together an integrated story arc that was planned out 10 plus years into the future, and then he really focused on executing on each movie, and he wanted to make each a success, not only as a standalone property, but as part of a broader universe that culminates in these key team-up movies such as the Avengers which, I think, came out in 2012. We just had Thor: Ragnarok, that was another one, Captain America: Civil War was another one and now with the Avengers movie, End Game, being released at the end of this month.
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