In this week’s newsletter, we talk about Disney’s billion-dollar boardroom battle, Kerala’s financial crisis, Rule of 72 and more.
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Disney’s billion-dollar Boardroom Battle
Disney just won a Board battle against its critic Nelson Peltz.
Wait… Who’s Nelson Peltz?
Well, he’s Hollywood actress Nicola Peltz’s dad. But at Disney, he’s an activist investor.
No, he’s not fighting for the rights of Disney employees, if that’s what you thought. Rather, he’s a minority shareholder who has been campaigning against the management to pressure them into changing how the company is run. That’s where the term ‘activist’ comes from.
And Nelson Peltz has been raising his voice against Disney for over a year. He has been upset about its financial performance.
See, Disney pumped big money into streaming over the years. It was competing with the might of Netflix and needed to keep churning out content. And since it’s also in the movie production business, it needed to keep churning hits on that front too. But the grouse is also that it overpaid for 21st Century Fox (Fox). And its costs and debt skyrocketed since 2018.
Obviously, that took a toll on earnings at Disney. For context, their earnings per share dropped by as much as 50% between 2018 and 2022.
And Peltz was also furious with Disney’s succession planning. He believed the question of “Who next after the current CEO?” wasn’t being answered satisfactorily. You see, its now-CEO Robert Iger (popularly known as Bob Iger) has been at the helm of the company for nearly two decades. In fact, as of today, Iger has delayed his retirement 5 times, when he was originally supposed to retire in 2015!
Even his brief exit as CEO in 2020 didn’t work out, as his successor Robert Chapek (or Bob Chapek) pleased neither Iger nor the shareholders. And with the share price under pressure, Iger stepped back into his CEO chair two years later.
So you can see why Peltz was screaming about the lack of a succession plan.
And to shake things up at Disney, he picked up a stake in the entertainment firm through his hedge fund Trian Fund Management.
And Trian made a simple demand ― give Peltz and a former CFO of Disney a place on the Board of Directors so that they can salvage Disney’s disastrous destiny.
Now these demands sort of rattled Disney’s shareholders. Maybe because Peltz had done similar things at biggies like P&G (Procter & Gamble) and PepsiCo earlier.
So Disney decided to put its own plan in motion to convince shareholders not to back Peltz. It reinstated dividend payouts. It began a full reorganisation of its movies and television studios in such a way that content decisions and financial performance would go hand in hand. It began to cut losses in streaming. And the big one — it decided to slash 7,000 jobs and reduce its bills by a whopping $5.5 billion.
And with all these changes, Peltz decided to back off a bit.
But it didn’t matter. 2023 was Disney’s worst year at the Box Office. It was the first time since 2014 (excluding the pandemic) that none of its movies made it to the billion-dollar club. Maybe viewers were tired of the same old superhero wine being served in a new bottle.
In the meantime, the top three global hits Barbie, The Super Mario Bros Movie, and Oppenheimer, were all made by Disney’s rivals.
Disney’s stock price crashed to an 8-year low too.
And if you haven’t guessed what happened next, Peltz was back with his activism at Disney. This time with more power, because here’s the twist.
Remember we told you that Disney fired some employees to cut costs?
Well, one of them was Isaac Perlmutter. He was Marvel Entertainment’s chairman and one of Disney’s biggest shareholders. You can imagine he wasn’t pleased at being laid off. So he probably decided to become an Avenger for real. Because the next thing you know, he entrusted Trian with the voting rights of his Disney shares. He’d gotten this big stake when he sold Marvel to Disney for $4 billion in 2009.
And this only made Peltz’s campaign stronger.
Armed with these voting rights, his hedge fund went after Disney’s management. And that culminated into a lengthy proxy battle or a fight that happens when shareholders use their proxy votes to challenge a company’s management or elect someone new to the Board.
Peltz wanted a proper succession plan freeing Disney from Iger. He wanted Netflix-like margins of 15-20% by 2027 by improving customer engagement and experience. And he wanted to improve Disney’s theme park business by addressing competition from others like Universal Studios.
That would ensure that Disney’s flywheel would actually keep going.
Sidebar: The Flywheel effect is a concept developed in the book Good to Great (2001) by business legend Jim Collins. A flywheel is a massive wheel that takes a lot of effort to start spinning. But once it does, it picks up momentum almost by itself. In business, once a sales cycle or Flywheel starts to take effect, each element increases, taking on a life of its own.
And this is how Walt Disney had imagined that Disney would make money way back in 1957. Simply put, Disney thinks beyond the Box Office while creating content. If this content becomes a hit, it takes the form of merchandise, comics and even a place in Disney’s theme parks through franchisees, creating a sustainable vicious circle of revenue generation.
Source: Harvard Business Review
But Disney’s Board didn’t think that Peltz and his team had the experience that the entertainment industry required. And that meant that they fought tooth and nail against Peltz, spending billions of dollars in the process to convince shareholders to vote in favour of Disney.
And last week, Disney tasted sweet success. Peltz was defeated.
But the battle is only half won. Disney now needs to prove to its shareholders that its incumbent management and Board are capable of turning around the House of Mouse. If not, it could be asking for another proxy drama from activist investors like Peltz. And you bet Disney can’t afford to squander billions of dollars more on boardroom battle again.
Why is Kerala in a financial crisis?
Kerala took the Central government to the Supreme Court with a first-of-its-kind case. And things are getting ugly.
Wait…what?
Well, Kerala is in the throes of a financial crisis. It defaulted on salary payments to more than half of the 5.15 lakh employees. It delayed payments of pensions to retired personnel. At one point, even police vehicles were shooed away from fuel pumps because the dues hadn’t been cleared.
Yup, things were that bad.
And the state is blaming its current predicament on the Central government.
But why, you ask?
Well, let’s take it from the top.
Now the first thing you need to know about Kerala is that it’s what some experts call a chronic revenue-deficit state.
See, Indian states get revenue from a few sources — they have excise duty on things like alcohol, they tax vehicles, there’s tax on property, tax on electricity, and there’s state GST (since 2017) as well as a share from the central pie. This is the revenue receipt.
And states use this revenue to first meet their committed expenses — things like salaries, pensions, welfare schemes, and interest payments. All of this is part of the revenue expenditure because it’s like maintenance spending and does not create any assets.
Ideally, states would love it if they can keep this kind of spending to a minimum. That way, they don’t need to borrow money to invest in building infrastructure like roads which have a long-term multiplier effect.
But the problem is that Kerala’s committed expenses have typically always been on the higher side — it is 71% of its revenue receipts when compared to other states which average below 60%. So it doesn’t have too much leeway to invest in infra projects that can generate more jobs and revenues.
Sure, that looks bad. But as per some reports, it’s simply because Kerala has invested heavily over the years in social sectors like education and healthcare. These sectors are personnel-heavy. And that has led to more cash pressure on the state.
Heck, it’s because of all this spending that a child born in Kerala has a better chance of surviving to age 5 than in the US. You can bet that other states in India can’t boast of such stats. So maybe you can excuse the spendthrift behaviour.
But not everyone agrees with that justification.
They say that if you want to spend money, you need to figure out a way to make more money as well.
And that’s where Kerala has struggled. While the state has a per capita GDP that’s 1.6 times higher than the Indian average, when it comes to the tax-to-GDP ratio, it’s at par with the rest of the country. It simply hasn’t been able to earn a higher share of revenue from taxes.
As one paper put it, “[Kerala] ‘competes’ with the Scandinavian countries as regards social protection with African level taxation.”
And the end result of this is that the state has been in financial trouble for years now.
So, why did Kerala blame the Centre and take the government to the Supreme Court all of a sudden?
Ah, that’s because Kerala alleges that the Central government’s new rules have compounded its woes even further.
The bone of contention is something called the Net Borrowing Ceiling (NBC) rule imposed by the Central government. Think of this as a diktat on how much money a state government is allowed to borrow to meet its needs. Mathematically, it’s 3% of a state’s GDP. And Kerala’s NBC was pegged at a little over ₹32,400 crores for FY24.
But here’s the deal now. Kerala has a state-owned enterprise called the Kerala Infrastructure Investment Fund Board (KIIFB). And this entity finances the infrastructure in the state. Until now, its debt was not considered under the State’s borrowing limit. So Kerala could freely fund its infra needs outside the ambit of the NBC. It was called an off-budget borrowing
Sidebar: Even the Central government has used the National Highways Authority of India (NHAI) in this manner.
But then, the Finance Commission closed this loophole in 2021 and Kerala’s problems multiplied. Suddenly, all of KIIFB’s debt was included in the state’s borrowing too. And Kerala found that its NBC was closer than it appeared. Its borrowing avenues were shut.
And when it asked the Central government for help, it was turned away.
Now Kerala says this violates Article 293 of the Constitution which says that public debt of a state is its own matter and not something the Parliament should have control over. So it took the matter to the Supreme Court.
And what did the Supreme Court say?
Well, we don’t have an answer yet. Since it’s the first case of its kind, we’re soon going to have a five-judge Constitution Bench set up by the Chief Justice of India to look into this matter. But that’s going to take some time.
And in the meantime, Kerala’s financial woes continue.
PS: Kerala has also complained that just because the state has a high per capita income, it is being penalised by getting a lower share of tax revenue from the Centre. This has reduced its revenues already. It’s something Karnataka has protested about too.
Money tips 
: Rule of 72
What if we told you that you can use a simple formula to predict the time it’ll take to double your investments?
It’s not even rocket science. All you have to do is divide 72 by the annual rate of return you’re expecting on your money. And voila! It’ll tell you how many years it’ll take for your savings to double itself.
Let’s take an example. Let’s assume that you’ve invested ₹1,00,000 now and you’ll get an interest of 8% every year. That means, your ₹1,00,000 will become ₹2,00,000 in approximately 9 years (72/8).
But how does this rule work, you ask?
See, this investing rule has been used for ages. In fact, its initial reference dates back to a 15th century work called Summa de arithmetica by an Italian mathematician Luca Pacioli.
But he doesn’t really tell people how he arrived at this investment doubling formula. So it’s possible that he was just building on the work of an earlier scholar who’d figured out something similar. In fact, the calculation could be even more accurate if we use the number 69 instead of 72. But since 69 isn’t a very easily divisible number, we use 72.
But here are three things to keep in mind.
This formula only works when you’re earning a compound interest on your investment. Or interest you earn on both the initial money or principal you invested and the interest that principal has accumulated from previous periods. So even if you have a constant principal lying in your savings account, you can’t use this rule to estimate when your savings will double.
Don’t be too excited thinking that you could use this for any kind of investment because this formula may not be the best fit for your stock or mutual fund investments. And that’s because you might consider the annual average return of these investments based on how they’ve performed in the past. But past performance doesn’t guarantee that returns will be the same in the future, no? If the returns fall, your average annual return gets affected and your calculations can go haywire.
So when do you use this, then? You could use it for other goals like saving up for a down payment for a car or home you’ll buy in the future or even for putting aside money for your higher education, wedding or retirement. But before that, read the next exception too.
This rule doesn’t consider the diminishing power of your doubled investment. Simply put, going by our previous example, the ₹2,00,000 you make after 9 years won’t be able to buy you the same number of things that you can buy today. That’s because the purchasing power of your savings drops as inflation eats into it.
And to fix that you can simply use the same formula to find out how many years it’ll take for the purchasing power of your savings to halve. So, if the average inflation rate is 5% every year, the purchasing power of your investment will halve in about 14 years. Don’t forget to factor that in when you’re using this rule.
And that’s all for today folks! If you learned something new, make sure to subscribe to Finshots for more such insights 🙂
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