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Activist Investor Ready to Fix Disney, Again

Motley Fool - Sat Oct 28, 2023

In this podcast, Motley Fool host Ricky Mulvey and analyst Jason Moser discuss:

  • UnitySoftware CEO John Riccitiello stepping down from his role.
  • How Unity handled pricing changes with its developers.
  • Trian Fund Management increasing its stake in Walt Disney.
  • Questions about Disney's turnaround story.

Plus, Motley Fool host Alison Southwick and personal finance expert Robert Brokamp discuss the growing trend of "unretirement."

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct. 10, 2023.

Ricky Mulvey: An activist investor is ready to fix Disney again. You're listening to Motley Fool Money. I'm Ricky Mulvey. Joining us today is Jason Moser. JMo, good to see you.

Jason Moser: Hey, Ricky. Good to see you. How's everything?

Ricky Mulvey: It's going all right. We got a little bit of a leadership shake-up to talk about over at Unity. Unity Technology CEO John Riccitiello is stepping down amid a controversial change to the company's pricing structure. The company itself helps developers create and operate content in 2D and 3D. A lot of video games in it. There are some other applications, but if you're on Pokémon GO or Among Us, that is operating on the Unity system. It makes a lot of money from ad revenue from those games, and it's looking to move to a more of a royalty model. What are some of those pricing changes that has the developers upset?

Jason Moser: This was an interesting one. I'm glad you mentioned the gaming aspect of it because Unity does a lot, but I think it's a very important part of the gaming universe. This was something they referred to as a runtime fee. What is that? What is a runtime fee? The Unity runtime, it's a code that executes on player devices. It makes Made with Unity games work at scale. When you're talking about billions of monthly downloads, that is what matters most. These games need to work for a lot of people all at once. They introduced this thing, this Unity Runtime Fee, which was based on a fee every time a qualifying game was downloaded by an end user. If you remember, this was something that really created a lot of controversy. A collective of developers actually came together and penned a letter voicing their anger regarding this. They were not happy. I think it's important. This developer's letter, actually, they put it into, I think, relatable terms.

That's what they said in the letter actually. To put it in relatable terms, they said, what if automakers suddenly decided to charge us for every mile driven on the car that you bought a year ago. The impact obviously would be through the roof. It seems like this runtime fee that they were trying to implement was changing the rules of the game after the fact. Even worse, they never actually took into consideration feedback from developers. They just went in and did this unilaterally. They didn't really think about their community of developers and how this was going to impact them. The community of developers came together, they penned this letter, they voiced their disapproval with this, and said they were going to be bowing out of using this Unity software until they actually came to a resolution here. Unity backtracked on this. Marc Whitten, who's the leader of Unity Create, put together a letter and walked this back, said they were sorry that they didn't take into consideration the feelings of the developers. In this case, they shot first and aimed second. It's hard to understand exactly where Riccitiello's role was in this, but as the CEO, the buck stops with him. I'm not certain if this is something that pushed him out, but here we are.

Ricky Mulvey: They did change some of the runtime fees. It's like these fees are only forward-looking. I think a lot of the developers were upset, that it was going to be retroactive, and it was difficult to measure. What's an install if you install a game on multiple devices? They seem to have addressed that a little bit. Regardless, there's a long Internet forum where you'll see the trust is broken [laughs] by developers multiple times. The stock has had a rough couple of years. I'm being generous with that. As a shareholder, it's something that I have experienced with the roller coaster going exactly one direction. But today stock is up about 5% on just the announcement that Riccitiello is leaving the company. What do you think the market's reacting to it? Like certainty, and now you've got a company with a little less of it.

Jason Moser: True. There's a little uncertainty there as far as the CEO. I think when you consider the bigger picture, Riccitiello has been there for, what, something like nine years. He comes with a lot of baggage. There's some accusations of sexual harassment. Just some questionable behavior on the part of him that, I think, rubbed a lot of people the wrong way for a while. I think when you make the argument for investing in Unity, he's not really a part of the bull case. It's not to say that you can't make a bull case for a company without putting leadership in there, you certainly can. But it is really nice when you can point to good, strong leadership and make that a part of the bull case. I just don't think he ever really was a part of the bull case, and so I think that could be part of the optimism there. Maybe part of the optimism too is just that this is a sign that the company is more willing to, at least going forward, listen to their customers. Their customers aren't really the end users. Their customers are the developers that are building all of this stuff with that Unity software. Maybe this changing of the guard is a sign that, going forward, they're going to be much more open to listening to their customers in helping build this platform where they can develop and bring in new users. The business is still not profitable. It's still not cashflow-positive, so there are those hurdles to get across as well. But maybe again, the market is looking at this uncertainty and saying there is a level of certainty in it and that we know that Riccitiello isn't going to be the leader of this business going forward. I can understand at least the glass half full perspective in regard to that.

Ricky Mulvey: What do you think about investors looking at the valuation? It's dropped from 40 times sales during the pandemic back to a more earthy six times sales for a software company. [laughs] Revenue is still growing like a growth stock. Does the uncertainty make you like this stock? Does it make it a little more palatable?

Jason Moser: The revenue definitely is growing. Six times sales is still a spicy meatball, as we like to call it. It is more palatable, for sure, but leadership transitions do come with big question marks. That said, this is a business that, I think regardless of leadership, what they have is something pretty special. They've been able to grow sales over the last five years at a compound annual growth rate of 36.5%. I suspect that's something that's going to be able to continue. I think that when you look at the letter from the creators regarding this runtime fee, I think that exemplifies how important this business is to its respective industry. When you read the letter from Marc Whitten, the leader of Unity Create regarding that runtime fee and walking that back, I think that's a sign that the business cares, that they're going to take into consideration what their creators think a little bit more going forward. It's not something where, on its own, I think now this is a no brainer. You invest in this business. I think it's certainly a lot more palatable, but again the revenue growth is one thing. We need to see them eventually start bringing that down to the bottom line. If they can do that [inaudible] , I think then the market really starts looking at this thing with a glass half full perspective.

Ricky Mulvey: Speaking of companies with leadership questions, let's talk about Disney. Activist investor Nelson Peltz is back in the mix. Trian Fund Management is now one of Disney's largest shareholders. They got about $2.5 billion worth of stock. It's about percent and a half of the company. It is not the first time Peltz has waded his way into this hornet's nest. He pushed for a board seat about a year ago but withdrew his bid after a very long slide show or an intriguing slide show, I should say. What do you think broke [inaudible] ?

Jason Moser: I think his patience maybe is running thin. I think, as investors, we have to be patient, but eventually that patience starts running out. A lot of times the stock price is just a proxy for that. Ultimately you get to where we are today. There's still a lot of question marks in regard to Disney. I think probably the biggest headline we've seen recently is that they're going to be I think doubling their investment in their park side of the business to something to the tune of $60 billion or something like that over the coming years. That's encouraging, but honestly, the theme parks, that's probably the most certain part of this business. That's not where the question marks lie. When you start talking about the entertainment side of the business, the streaming, all of these properties, media properties that they own, still a lot of question marks there. Iger hasn't done a whole heck of a lot to answer that, other than to say the wheels are in motion. Wheels in motion, that's one thing. We need a little bit more clarity as to what this business is going to look like in the coming years.

Ricky Mulvey: Jason, that's a great corporate term if you haven't started a project yet, but people are asking for updates. The wheels are in motion.

Jason Moser: Wheels are in motion.

Ricky Mulvey: Speaking of wheels in motion, though, Disney has made some moves. Besides the $60 billion promised spend in theme parks, it's also increased the streaming prices. Ad-free versions of Disney+ and Hulu are up about 20%. The dividend is allegedly coming back in 2023. But I do wonder, do any of these moves matter if Iger has not named a successor because it seems like that could quell a lot of this investor outrage.

Jason Moser: I think they do matter now. Iger is going to be there for a little while longer, but I think that you've keyed in on there on a bigger problem. Perhaps the biggest problem is Disney's got an Iger problem. They still have not figured out how to get beyond Bob Iger. It's not to say Bob Iger is a bad leader or a bad CEO, but clearly, they need to figure out a way to get past him because it's become almost comical now. How many times we've talked about Bob Iger is leaving. Oh no, he's renewing for a few more years. The guy even wrote a book, and I bet you, if he had it to do over again, he'd need to probably [inaudible] off in publishing that book as soon as he did. Regardless, I think they do matter, but I do think you're right. It speaks to the bigger problem here, which is success.

Ricky Mulvey: One of my favorite memes is just, basically, the book is titled Ride of a Lifetime, crossing out OF and replacing it with FOR.

Last time around, I think Nelson Peltz was pushing for one board seat. But let's say you get a call, JMo.

Jason Moser: Yeah.

Ricky Mulvey: Big Nelly P is on the phone. You guys have a little small talk about probably local sports teams, how your kids are doing. Look, it's tough to make small talk with a billionaire.

Jason Moser: Yeah.

Ricky Mulvey: Not a lot in common. But he's, like, look, listen, I got a second board seat at Disney. What moves are you going to push for if he gives that to you?

Jason Moser: I certainly don't want to simplify this and sound like I have all the answers. Some of the things that I think just make the most sense, and we're seeing, again, the wheels are, at least, in motion in regard to some of this stuff. Iger has noted that Disney is looking to tone down or quiet down their culture wars and respect the audience. Personally, I would just hold their feet to the fire on this. I really think they need to follow through. They need to stay out of the headlines regarding all of this culture war stuff. It's a net negative at the end of the day for your business, unless that the mission of your business is to get yourself embroiled in culture wars. Otherwise, when you start throwing yourself into the middle of these socio-political culture wars, you're alienating half of your customer base, half of your market opportunity. Half the folks out there just aren't going to agree with what you're saying. That's not what Disney's in the business of doing. They're in the business of trying to attract as many people as they can to their parks, to their media properties, and whatnot.

Then furthermore when you throw your company in the middle of stuff, and you say that your company stands for X, Y, and Z, particularly in regard to these debatable social issues, forget about just your market opportunity. Now all of a sudden, you've got a company with 200,000 employees. Ricky, it's a lot like the sun coming up in the morning, but not all 200,000 of your employees are going to agree with you either, so now you're creating internal strife. It creates an abrasive culture, friction within your culture there. The best bet is to try to keep yourself out of the headlines in regard to these social and cultural wars. Let that stuff just take care of itself. Take the big picture. We believe in being nice to people. We want to be inclusive, and we want to create a great product that everyone can enjoy. Leave it at that. Go forward. I would hold their feet to the fire in regard to that stuff. I also think that their streaming operations have the potential to be another one of the core entertainment holdings of most households. I think when you look at it today, Netflix is absolutely the core foundational entertainment property that most households revolve around.

I think that Disney has the opportunity to be another one of those core holdings, given all of the properties that it has. But they need to figure out a way to really bring these properties together and create a seamless experience that everyone can enjoy. I know they're working on it, but they've been facing some setbacks and some delays. I would really prioritize that. The $60 billion they're investing in the park side, that's great and everything, but the parks aren't where the question marks are. Really, it is these entertainment properties, their streaming aspirations, still a lot of question marks there. It holds a lot of potential. Then finally, you mentioned it earlier, the dividend allegedly is supposed to pick up here very soon. I would absolutely figure out a way to make this just a top priority. I know there are some concerns in regard to finances and the money that they may need to spend in acquiring Hulu or whatever else. This is a big company with a ton of financial levers. Right now, investors in Disney just have zero reason to be patient because they're not even able to rely on just some form of income there, whether it's semi-annual or quarterly or whatever they may get back to. So I would make that dividend a priority again as well and get that thing reinstated asap.

Ricky Mulvey: Yeah. The political issues are always interesting for a company whose business is quite literally escapism.

Jason Moser: Very well put.

Ricky Mulvey: I appreciated your point on animation, which is something that Iger held Michael Eisner's feet to the fire on, saying, so goes animation, so goes the company. That's a place where you'd like to see a little bit more innovation to maybe get some people in the parks beyond those upgrades anyway.

Jason Moser: Absolutely.

Ricky Mulvey: Jason Moser, I appreciate your time and your insight.

Jason Moser: Yes, sir. Thank you.

Ricky Mulvey: The pandemic pulled forward the retirement date for many Americans, but now some retirees are ready to go back to work. Alison Southwick and Robert Brokamp talk about the trend and what it means for savers.

Alison Southwick: During the pandemic we heard a lot about the Great Resignation, a time when more than two million people retired earlier than expected, according to the Federal Reserve. But many of these retirees are having second thoughts. Last year, an analysis by Indeed found that 1.7 million retirees were returning to work, some because they want to and some because they need to. Bro, let's take a trip in the Wayback Machine to March of 2021. Anthony Klotz, a Professor of Management at University College London, School of Management, coined the phrase, Great Resignation, amid many factors that made quitting and even retiring altogether extremely enticing. What were some of those big factors?

Robert Brokamp: The bottom line is, when people feel wealthier, they're more likely to retire. Crazily enough, the pandemic was good for many people's pocketbooks, at least until last year. The pandemic really started spreading at the beginning of 2020, the stock market drops by more than a third, and then it quickly rebounded. In 2020, the S&P 500 was up about 20%. The Nasdaq up more than 40%. House prices up 10%. That continued to 2021, where again, stock market double digit gains, housing market up almost 20% so you have that. But then there was all the government help. Almost $1 trillion in stimulus payments were made to households, so straight into their checking accounts, and then another $4 trillion came in other forms of assistance, like tax breaks or loans to businesses that didn't have to be repaid. You have all that money, and then you think, how much is going out? The answer is not so much because we were all stuck at home. The personal savings rate reached 32% in April of 2020, highest ever, and was still over 10% a year later. Many people looked at their net worths and said it's time to retire, especially older people who may have had concerns about going into the office while COVID was still a big concern.

Alison Southwick: In an environment like that, I can see how you might feel richer than you actually are. But over confidence or even potentially being forced to retire, that can probably happen in any economic climate.

Robert Brokamp: Yeah. Let's start with, most people actually aren't very good at predicting when they'll retire. A new study from Zhikun Liu, David Blanchett, Qi Sun, and Naomi Fink found that more than 50% of people retire sooner than they expected. Only 16% of people retire at the age when they predicted. Some of this is health. Anywhere from a quarter to a third of people retire sooner due to health concerns, either their own or maybe a spouse or a parent, so they have to stop working and take care of them, and then the other is wealth. If you're wealthier, you retire sooner. In the pandemic, it was both. You had health concerns, and we were wealthier. Another factor of people retiring maybe sooner than they should in any circumstance is something called, basically, you talked about overconfidence, I think it's over-optimism. There's something called the planning fallacy. That is, basically, people often underestimate things like the amount of time it takes to do something or the amount something will cost, especially home repairs and stuff like this, and that people tend to make decisions based on best case scenarios. Partially frankly, I think it's a justification to do something they wanted. Then I would say the other thing to point out is that people aren't very good at calculating whether they've saved enough to retire, and they often retire based on outside factors. The best example of this is that the most popular retirement age is 62, because that's the earliest age at which people can claim Social Security.

There are two problems with this. The first, just because you can claim Social Security doesn't mean you have enough to retire, and secondly, people are choosing permanently reduced benefits because the sooner you claim, the smaller your monthly Social Security check, except in cases where you have a short life expectancy, claiming Social Security at age 62 is the wrong choice for most people. You put all this together, and most people probably are retiring sooner than they should, and especially over the last couple of years. Vanguard published a report last year entitled, "The Great Retirement or the Great Sabbatical." They used Federal Reserve data to estimate whether recent retirees had enough to stay retired, and Vanguard's conclusion was probably not, especially those with a median level of retirement wealth who could run out of money as early as 75.

Alison Southwick: Now it's very much on brand for you, Bro, to make the defense of awfulizing your funds. [laughs] But that's not the only reason why people want to unretire.

Robert Brokamp: About half the people who retired retired due to financial reasons, and we all know them. First of all, it came down to having smaller portfolios and larger grocery bills. Last year, both stocks and bonds were down, stocks down between 20% and 30%. That's bad, not unusual. We should expect a 20% bear market every 2.7 years on average, according to Ryan Detrick of the Carson Group. It was that bonds also dropped more than 10%, worst year ever for bonds, and I think that really walled many retirees. Then as we know, inflation has reached levels not seen in more than 40 years. The higher cost of living is also driving some people back to work. But the other half of unretirees basically went back to work for some of the other benefits that a workplace can provide besides a paycheck, and that's like social interaction, intellectual stimulation, a reason to get out of bed in the morning because the bottom line is that I think retirees go through a honeymoon period, and they take the trips they always wanted to take, they do the projects they want to do, but that eventually fades. For some they decided to just go back to work because they actually didn't really want to retire. They just needed a break.

Alison Southwick: Now you said a lot of people who were enticed into retirement, they were maybe a few years out anyway, so it just brought it forward by a little bit, which means that they were in the back nine of their career.

Jason Moser: Right.

Alison Southwick: For those who are unretiring, how hard is it for them to reenter the workforce?

Robert Brokamp: There was a survey published by Paychecks earlier this year, and that found that about 20% of retirees are considering going back to work again, and just again a half of them are doing it for money, but 47% chose that they're getting bored, and 28% said that they're lonely, again emphasizing that it's money and other reasons. But there are a couple of disturbing parts of this survey. One is that, out of the retirees who returned to work, 74% said they experienced some judgment from their younger coworkers or discrimination, and 62% of hiring managers said that they are skeptical about hiring retirees, and the three biggest reasons were concerns about their ability to culturally reintegrate, possible ignorance of industry trends, and possible loss of job skills. Some of that may be true, but frankly to me it also sounds like ageism is alive and well, and so there definitely could be challenges to unretiring. That said, the unemployment rate is still historically low. Many employers are eager to hire older workers because the evidence is that they're obviously more experienced, they're more reliable, and they're actually more likely to show up at work at time and things like that, and in many cases, more productive. For those who want to go back to work, I think the first place to start, maybe your former employer as long as you left on good terms. Many of these unretirees are what we call boomerang employees because they're returning to their previous job, but often on more flexible terms.

Alison Southwick: Bro, what is your big takeaway for someone who wants to make sure they only have one retirement party?

Robert Brokamp: I have a few takeaways of course. The first is that traditional boring advice that anyone who is close to [inaudible] retirement should have five years' worth of portfolio provided income out of the stock market and in something super safe, cash, CD's, treasuries, maybe short term bonds, which fared a little bit last year than the overall bond market. I've heard from Motley Fool readers and listeners, who were retirees, they saw their portfolios drop 25%, 30%, 40%, and they didn't have the cash on the side, and now they're concerned, so definitely you've got to make sure you have that to weather any downturn because there's going to be one, if not many, during your retirement. The other thing I would say is if you think about retirement, decide if you really want to retire or if you just need a break so you can take a sabbatical, or if you want to work a fewer hours, and the majority of people who are unretiring are going back on a part time basis, which I think is a great situation for many people. But the biggest takeaway is that everyone should have a solid plan for how they're going to figure out whether they have enough to retire, and that could be just becoming very educated, it could be using a good retirement calculator and there are a lot of bad ones on the Internet. I've said before on the show, my favorite is one provided by CalcXML. Just do an online search for CalcXML, comprehensive retirement planning module, and you'll find it. That's a good one. But I think everyone should also see a [inaudible] financial planner a few years before they retire just to make sure they have all their bases covered.

Alison Southwick: One field that's famous for unretirement is the entertainment industry. Whether you're an athlete, an actor, or a musician, you can get away with calling it quits and then returning again when the fans demand it. Before we go, we're going to play a game inspired by an old friend of mine that he invented called Dead, Alive, or Branson. Now, for those of you who don't know Branson, Missouri, is a family vacation destination in the Ozarks. They call themselves the live entertainment capital of the world, wowing millions of visitors a year, with more than 100 musical acts, dinner or theaters and more. In my family, we have a number of tin-type photos dressed up as depressed pioneers taken at Silver Dollar City Amusement Park in Branson.

Robert Brokamp: I believe we have something like that too. [laughs]

Alison Southwick: I know a thing or two about the town from my childhood. But instead of playing Dead, Alive, or Branson, we're calling it retired, unretired or Branson. I'm going to name a performer, actor something, and you're going to tell me whether you think they are retired, unretired, or performing in Branson, Missouri. Are you ready?

Robert Brokamp: Okay. [laughs]

Alison Southwick: I think you're going to do well. The first one is Yakov Smirnoff, retired, unretired, or Branson?

Robert Brokamp: Wasn't he a comedian from the '80s or '90s or something like that?

Alison Southwick: Yes. Do you need me to give you a quick bio of Yakov Smirnoff?

Robert Brokamp: No, I think I remember. I'm going to say retired. I have not heard anything from him in a long time.

Alison Southwick: Bro, I'm sorry, you're wrong. The answer is Branson. Yakov Smirnoff, the Russian-born comedian and actor became a whole thing in the '80s, starring in movies and TV shows with his catch phrase. What a country? Remember that?

Robert Brokamp: I remember that.

Alison Southwick: I got you. You can see him performing a new show, Make America Laugh Again in his 2000-seat theater in Branson.

Robert Brokamp: Wow.

Alison Southwick: It's up for the whole family. Next up. Are you ready?

Robert Brokamp: I'm ready.

Alison Southwick: Daniel Day-Lewis, retired, unretired, or Branson? [laughs].

Robert Brokamp: I can't imagine him being at Branson. What I can imagine at Branson, and I think I'm right about this, was Terry Bradshaw. He did a whole live show there. I'm going to say retired, if I remember correctly.

Alison Southwick: Correct. The Oscar Award-winning actor retired in 2017, and he has yet to return to acting. However, if I'm being honest, he did retire in 1997 and unretired five years later to be in gangs of New York, Lincoln Phantom Thread followed. His form of immersive method acting apparently takes a toll on him. Maybe a light stint in Branson is just what he needs. [laughs] The last one is Abba.

Robert Brokamp: Oh my gosh. I'm going to say unretired. I can't imagine them in Branson, and I thought they were doing some reunion shows or something like that. That's my answer. Unretired is what I'm saying.

Alison Southwick: This one may be has it all. The Swedish pop group Abba had a number of massive hits in the '70s, such as Dancing Queen. Did you know they were the first winners of the Eurovision Song Contest with the song Waterloo?

Robert Brokamp: I don't know.

Alison Southwick: I feel like you would have known that.

Robert Brokamp: I didn't know, but I would just point out Mama Mia, of course, is also a great song, which I'm familiar with.

Alison Southwick: I think my favorite is SOS, but whatever, we don't need to get into it. Now the band disbanded in 1982, but unretired more than three decades later in 2016 and released a final album in 2021 just before calling it quits again, and so far they are still retired. The good news is that you can still go to Branson and see Thank You For The Music, the ultimate tribute show dedicated to the Swedish pop group, Abba. I'll bet it's a fun show.

Robert Brokamp: I bet it is too.

Ricky Mulvey: As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll see you tomorrow.

Alison Southwick has positions in Walt Disney. Jason Moser has positions in Unity Software and Walt Disney. Ricky Mulvey has positions in Unity Software and Walt Disney. Robert Brokamp, CFP(R) has positions in Walt Disney. The Motley Fool has positions in and recommends Unity Software and Walt Disney. The Motley Fool has a disclosure policy.

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