Warner Bros. Should Prioritize Its Shareholders Over Expediency

Sometimes we make high-stakes corporate deals more complicated than they really are.

Such is the case with the ongoing battle for Warner Bros. Discovery, pitting streaming giant Netflix against the more traditional Hollywood studio Paramount Skydance Corp.

Warner has agreed to sell itself to Netflix. Paramount, backed by billionaire Larry Ellison and run by his son, David, has “deal jumped”—or made a higher, unsolicited purchase offer—the Netflix transaction with a hostile tender offer that it proclaims is superior. And it may end up campaigning against the Netflix deal receiving the necessary votes for approval.

So what’s a Warner shareholder to do?

With two competing suitors, shareholders are in an enviable position. But they can still lose here. To ensure the best outcome, Warner directors need to rise above the natural attachment they may have formed to the Netflix option and stay focused on their duty to maximize value. That means fully and objectively exploring what Paramount has to offer.

As usual, each potential acquiror maintains its side provides the best value when accounting for the risks and costs associated with completing its deal. Both have published reams of financial and regulatory analysis supporting their case. But putting aside for a moment the spreadsheets and expert advice, sometimes mergers and acquisitions is as simple as understanding the human element behind dealmaking.

Directors of companies that have agreed to sell usually work diligently and in good faith to maximize shareholder value when conducting a sales process, as the Warner board likely feels it has done so here.

When I ran the group at influential advisory firm ISS that was tasked with weighing in on these situations, I observed an interesting phenomenon. Sometimes, the hundreds of hours required to arrive at an agreed transaction led to a hardening commitment to that decision.

Even if the facts on the ground change—as they appear to have done here, with Paramount amending its offer to address concerns—directors and CEOs can be loath to reverse themselves. Moreover, the army of advisers, many of which will be paid vast sums only if their client prevails, are highly incentivized to ensure “their deal” wins.

It’s human nature for a board to become defensive when its decision is publicly criticized. But that natural human foible can, and often does, conflict with the fiduciary duties directors owe shareholders. To oversimplify, directors who have chosen to sell a company are required to prioritize maximizing shareholder value above virtually everything else—including their own preferences.

Merger agreements, including the Netflix agreement, provide selling companies such as Warner a “fiduciary out” that requires the target board to rethink prior decisions if an alternative transaction is reasonably likely to result in a “superior” deal in terms of risk-adjusted shareholder value. Warner has such a right here and can engage Paramount without losing the “bird in hand” Netflix deal.

Shareholders almost universally consider more engagement in an M&A context to be in their best interests with little downside. The burden falls on target boards such as Warner to justify a refusal to hear out an alternative buyer.

It appears that the Warner board has cause to exercise its “free option” to engage with Paramount in good faith. Ultimately, each shareholder will have its own views on the underlying issues and will have the right to vote up or down on the Netflix deal or tender into the Paramount offer.

None of this should be considered controversial. Maybe the Warner board is now simply playing hardball to try to force Paramount to bid against itself. But it risks frustrating shareholders who are threatening to vote against the Netflix deal if Warner doesn’t genuinely engage.

Last year, ISS criticized the Warner board for its “limited responsiveness to shareholder concerns following consecutive years of low [shareholder support for] ‘say on pay’ proposals.” Although executive compensation isn’t central to the current M&A fight, board accountability to shareholders remains highly relevant.

For shareholders to truly win, Warner’s directors need to be accountable. That means looking past the fact that the Netflix deal is “done” and exercising the contractual right to explore an alternative outcome that maximizes shareholder value.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Christopher Young is the founder and former head of the special situations group at ISS, and more recently global head of contested situations at Jefferies and Credit Suisse.

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