Donald Trump vs Bally and the World’s Wealthiest Shareholders

Case-In-Point: Donald Trump vs Bally
Name
University of Delaware
FINC 854: Seminar on World’s Wealthiest Shareholders
Date
1 Background of the Active Investor
Relevant experience
Before New York based real estate developer Donald J. Trump became the 45th president of the United States he had invested in various companies even as his business is associated with real-estate properties as a shareholder activist. Trump tried to influence the management decisions of the companies where he held large stakes. Real estate investors have a monetary stake in the deals that they make, but they also need effective real estate investing partnerships to make profits. Trump has been aligned with fellow developers and lawyers who are knowledgeable on real estate allowing them to negotiate favorable deals. Having total control over almost all the aspects of a project besides the financial arrangements and sale of the real estate projects allowed him to expand the real estate empire. Trump concentrated his investment in few firms in hotels, casinos and resort market, which firms that enable him to closely watch changes in the market and real-estate.
The terms partnership were often favorable to Trump and partnership with Holiday Corporation allowed him to invest more in casinos and hotels. Trump is a master dealmaker and the deal with Harrah’s at Trump Plaza in the early 1980s, allowed him to get a share of the company’s income and he was reimbursed cost during constructions. From Trump’s involvement in the real estate management he sought entry into the Atlantic City casino business, but there was fallout with the Holiday partners, who were also competitors with Golden Nugget. In an attempt to gain an upper hand in negotiations, Trump tried to force out Holiday to have more control on investment decisions. Trump became an aggressive shareholder activist in the 1980s and launched corporate governance battles to expand his investments in Atlantic City. While investments in such firms were short-term, there were opportunities for Mr. Trump to make contracts with other investors whom he worked with as partners in his real estate business.
Active management
Activist investors during the 1980s US economic boom benefited from investing in their targeted companies and threatening to takeover firms. A handful of targets as companies sought to protect themselves from the corporate raiders. The high-risk and high-reward takeover environment was rewarding to those who were able to make deal-making strategies as is the case with Trump and he was associated with greenmail, but he denies that his investments were meant to threaten hostile takeovers and influence the rise of shares where he would then sell at a profit company’s management However, unlike, other activist investors who suggested that the companies they invested in, sell their non-core businesses and divest, Trump rarely outlined his strategies to improve financial performance.
Trump chose viable companies to invest in projects that are financeable since there is proof that such businesses are less likely to experience cash flow problems when compared to the competitors. Businesses that leverage their competitiveness are attractive investments and especially when they prove that they can expand and grow. Speculation often influenced change in the targeted firms’ defensive strategies, and the defensive measures also influence the rise in the stock prices. Trump’s four month active investment program at Bally earned the investor a $24 million gain with Bally choosing defensive strategies and then ageing to buying back shares from Trump (Cohen, 1987). Even when companies are underperforming the management and board of directors still seek to influence major decisions and control operations.
Getting the beast deals and effective negotiation in real estate deals have been top priorities for Mr. Trump, and this is reflected in his investment in companies such as Bally. Lawyers and developers are important to determine a reasonable share of investments in real estate property when there are partnerships. Trump was aggressive in fighting competitors and choosing the partners that allowed him to get favorable deals. From the mid 1980s, Trump bough millions of stocks and even as he used borrowed money to invest in Holiday Inn and Bally Manufacturing, he made profits within short periods of time. In such cases, Trump insisted that his stakes in the companies were simply investment opportunities, but this also signaled to the competitors that the competitors were likely to be in hostile takeover bids, and they were forced to take defensive measures mostly incurring more debs to make them undesirable targets. While Trump backed off investing with the firm and the competitors, he made huge gains in firms where he made huge investments
Choice of hotels and casino investments
There had been ongoing feuds between Holiday Corporation and Trump as the partnership worsened with Trump seeking more influence in how Harrah’s property in Atlantic City was used. Subsequently, Harrah’s approached Trump and the company agreed to sell half its stake to Trump and Trump became the hotel and casino owner company in early 1986. In the mid 80s many companies offered premium payments to the big shareholders who threatened hostile takeovers or were a nuisance (Wall Street Journal, 1986). Thus, repurchasing shares at a premium to the share market price seemed a better option for the casinos, resorts and hotels as there were protracted takeover bids and lawsuits. The threats of lawsuits may have affected the competitiveness of the company that was forced to incur higher costs to defend itself.
The interaction between Donald Trump and the management of Bally Manufacturing Company partly explains Trump’s strategies of negotiating to get profitable deals. When Trump acquired 9.9% of the stake in Bally he indicated that he intended to make significant investment in the company and he was intent on defending shareholders intent. First, Bally sought to defend themselves and ensure if there was a takeover it would be friendly, but then agreed to purchase the Nugget casino and resorts while still negotiating with Trump. Other shareholders sued Trump and Bally arguing that there was violation of the company’s fiduciary duty when Trump was paid shares at a premium as well as waste of the corporate assets. The investors also highlighted that Trump’ intention all along was to increase speculation so that Bally would repurchase his stake at a profit and he did not intend to make major investments in Bally as he had previously stated.
2 Chronology of events related to the active investment program
Date

Announcement

11/21/1986

Trump Holds Stake in Bally Equal to 9.6% (Source: Wall Street Journal).

1/191987

Bally signs deal to buy golden nugget casino (Source: New York Times)

2/23/1987

Bally to Buy Back Trump’s Holding, Ending Bid Threat
(Source: Wall Street Journal).

On 21st November 1986, Donald Trump held a 9.6% stake in Bally Manufacturing Corporation and waned to increase his holding to 25%. Mr. Trump had sought to buy Bally’s shares when they were trading to $ 16.50, and he later acquired more shares to increase his stake at Bally to just below 10%. Bally operated a number of casinos and when Trump sold the shares he ought to have informed the shareholders that there were greenmail negotiations with the company. If there were disclosures this would have affected the share price earlier. This was one of the major investments and had acquired UAL, Holiday, Federated, before buying stakes in Bally and also invested in Gillette and Golden Nugget. In acquiring the stake in Bally, Trump highlighted that he believed the company had a good potential, and it added to his investments in hotels and casinos.
On 19th January 1987 Bally Purchased the Golden Nugget Casino-Hotel to discourage Trump from going through with the takeover. This was Bally’s second casino hotel in New Jersey’s Atlantic City, and the directors of Bally and Golden Nugget approved the deal. In 1986 Bally had already acquired 2 MGM Grand Hotels in Las Vegas and Trump had sought to acquire a stake in these hotels.
Since Trump’s stake had increased above 5% on 21st November, he made arrangements to fill Schedule 13D is a form with the U.S. Securities and Exchange Commission (SEC). Mr. Trump already owned two-hotel casinos in the Atlantic City area and was looking for opportunities to own more hotels and casinos (Cohen, 1987). Bally had various operations including tennis clubs, health clubs, amusement parks and video arcades, and catered to gaming, hotel and casino customers. The management of the Chicago-based gambling- amusement game company, Bally Manufacturing, and then had to make a business decision on whether Trump's Bally stake would affect their business.
On 8th December 1986, Bally defended themselves against Trump’s hostile takeover through focusing on restricting as part of the poison-pill strategy, which would make the takeover untenable and they also filed a lawsuit against Trump. Subsequently, Bally Manufacturing considered different options to increase the shareholder value, while focusing more on the hotel businesses as well as the casinos at Nevada and casinos. Bally’s management sought to keep control of the company’s important assets so long as they were able to recapitalize even if this meant selling some of assets and unprofitable business segment. Share price rose on rumors of bids on 21st November 1986 and before Bally bought back the shares on 23rd February 1987.
The case for using the poison pill strategy is that it would increase the cost of a takeover in the case where an unsolicited investor acquired more than 20% of the company’s stake and the shareholders would then have the right to purchase the shares at half-price. Bally’s lawsuit would further make it harder to hold the shares since he would be forced to sell his stock. The company further argued that Trump violated the securities laws by expanding his casino empire without fully disclosing his interest in seeking to acquire Bally.
On 17th December, Trump filed a countersuit arguing that Bally’s directors and officers were intent on enriching themselves. In the suit, Trump also argued that the managers and directors took exorbitant salaries and other lucrative perquisites, while ignoring the shareholders interests. For instance, the then CEO and chairman, Robert E. Mullane received $1.2 million in both salaries and bonuses the previous year, and this was high when compared to the top executives in most of the public held concerns. Trump also pointed out that the executives wanted to discredit him with the Nevada Gaming Commission at a time when he was seeking a license, and there were allegations that the parting chairman of commission indicated that Bally’s officials alleged Trump wanted the company to repurchase his stake in the company at a premium.
The dispute between Trump and Bally continue and to further protect the company, Bally made an agreement to buy a casino owned by Golden Nugget Inc at Atlantic City and land nearby in a deal worth $140 million in cash and mortgage. This potentially threatened Trump’s move to acquire Bally since under New Jersey law individuals were allowed to own three casinos. Adding the Golden Nugget inc casino would increase Bally’s casino holding to two in New Jersey, and if Trump was to own Bally, he would no own 4 casinos and violate New Jersey’s law. However, on 29th January 1987, Trump indicated that he would not sell his stake in Bally and he was still deciding on whether to make another bid, and he would find a buyer for the property owned by Golden Nugget if he made a successful bid.
On 21st January 1987, there was an agreement between the investor and the company, which would result in a delay in the acquisition of the Atlantic City based casino. This occurred since Mr. Trump went to court and got a restraining order against Bally preventing them from buying the Golden Nugget Inc’s casino-hotel. To Trump, the action was also helpful to the shareholders since Bally’s management would be more responsive to their needs even as the managers earned $ 2 million annual pay packages. Then on 2nd February, Trump increased his stake in Bally to 9.9% as he had the option to exercise additional shares.
To avert further lawsuits and a hostile takeover, Bally agreed to buy Trump’s 9.9% stake in the company at a premium on 23rd February 1987. Subsequently, Bally paid $ 83.7 million for Trump’s stake in the company and added $ 6 million for “certain expenses”. Mr. Trump would make approximately $ 24 million in profit from his stake, and he agreed that he would not buy a stake in the company or make any other bid for Bally. Since Trump still owned a stake at Bally’s management was intent on improving the financial performance to avoiding paying Trump again at a premium as the agreement was that the remaining stock would be bought at $ 33 per share and worth $15.1 million. Additionally, Bally had the option to purchase Golden Nugget Inc’s casino, while both parties drooped their lawsuit. Members of the Casino Control Commission were concerned with Bally’s a defensive actions in fending off Trump as they put Bally in a worse financial situation. The Commission argued that Trump relied on the practice of greenmail, where investors threaten a hostile takeover and in turn influence the target company to offer premium stock prices.
After Trump had boosted his stake in Bally to 9.9% on January 22 1987 he had more leverage to launch another takeover bid. Between January and February 23rd when Bally repurchased the shares from Trump, the investor did not buy any shares from his broker, Bear Stearns. In January 1987, Bally agreed to buy Atlantic City based Golden Nugget Inc’s casino- hotel, and while this was one way to thwart a takeover bid, Bally bought buy back Trump’s stake. On 23rd February, which ended the threat of a takeover Bally agreed to purchase Trump’s stake at a premium and Trump had the option to sell the shares at $33 in the open market for the remaining shares that were not purchase in the buy-back program.
3) Changes in stock price performance
On February 1987 then there was a slight increase in the stock value when compared to February 1986, and this was partly to speculation surrounding Bally’s repurchase of Trump’ stake. Bally not only bought shares from Trump at a premium, they also intended to purchase the Golden Nugget, and both decisions would affect the company’s cash flows. Later in March 1987, Bally Manufacturing agreed to divest the health-club chain and was set to receive cash, securities and assumed debt and this was one way for the company to remain competitive. This followed Bally’s sale of Six Flags theme amusement parks in April to offset debt attributed to Six Flags. In 1987, Bally’s Long-term debt had soared when the management decided to purchase the Golden Nugget Casino Hotel in Atlantic City, and this likely affected the stock’s value and investors perceptions on whether the move would improve competitiveness.
Date

Stock Price of Bally

Value of S & P Index

11/21/1986

$21.25

$245.86

1/19/ 1987

$19.625

269.34

2/23/1987

$18.63

$282.38

% Change

-12.35%

14.85%

Bally's board approved a share repurchase plan to pay Trump $ 83.7 million for his stake in Bally with each share equivalent $ 24.08 of the 2.6 million shares out of the 3.1 million shares that Trump owned . Given that the stock price on 21st February 1986 was $ 21.25, there was a 12.35% decrease in the value of Bally shares to $18.625. This was lower than the 14.85% for the S& P 500 index, but when considering the share price trend, the sales value was higher because of speculation and Bally paid a premium price. For the other remaining shares, Trump had the option to sell the shares at $33 per share (Cohen, 1987). The threat of a hostile takeover partly influenced the decision to repurchase Bally’s shares at a premium.
The Buy-and-Hold (BHR) returns is another approach considering the returns at time t and t-1 where the buy-and-hold annual returns for a firm’s stock are considered. The difference in the Buy-and-Hold (BHR) shows the return inclusive of the distributions and stock splits. When considering abnormal or unexpected return buy-and-hold returns (BHR), the average BHR was -0.00337933 from the period 11/21/1986 to 2/23/1987 and a negative BHR is interpreted as underperformance.
Date

Company Share Price

Company Returns

1+Gillete Return for Day

1+BHR for Gillette for day t-1* Gillette for day t

BHR = (Previous column-1)

19861120

21.625

0.042169

 

 

 

19861121

21.25

-0.01734

0.98265896

0.98265896

-0.01734

19870119

19.625

-0.02484

0.97515528

0.940119759

-0.05988

19870223

18.625

-0.05096

0.94904459

0.943037974

-0.05696

The 2-Day Abnormal Return is similar to BHR, but considers the difference between the actual returns and the market returns.
Date

2-Day Abnormal Return

Event

19861121

-0.0182318

Trump Holds Stake in Bally Equal to 9.6%

19870119

-0.0363364

 Bally signs deal to buy Golden Nugget casino

19870223

-0.0400965

Bally to Buy Back Trump’s Holding, Ending Bid Threat

Total

-0.0946647

 

The 2-day abnormal return on 21st November 1986 was positive for the S & P stock index, but negative for Bally’s stock. The abnormal returns are the actual returns less the market return and for the three dates 21st November 1986 at -0.018 to 23rd February 1987 at 0.040 Since there were negativ...