TCS Daily

Mr. Deeds Goes to Wall Street

By Stephen W. Stanton - May 29, 2003 12:00 AM

Hollywood just does not understand Wall Street. If some movie stars have their way, neither will anybody else.

Consider Adam Sandler's tirade against corporate wealth, "Mr. Deeds." The film rehashed one of the oldest themes in Hollywood. When a twist of fate makes a blue-collar guy filthy rich, he uses his wealth for good, unlike other rich folks. Of course, this Hollywood definition of "good" is not the same as Webster's. In Tinsel Town, destroyers of capital are lauded as heroes. Conversely, wealth-creating capitalists are derided as mercenary exploiters. (Karl Marx's descendents should demand royalty checks and a creative credit.)

In the movie, Sandler plays a nice guy from a small town. He is shocked to discover that he is the sole heir to an eccentric tycoon's $40 billion estate. The bulk of the fortune is tied up in 300 million shares of Blake Media Inc., representing a 49 percent stake.

When the company's CEO learns of this inheritance, he concocts a "diabolical" plan: He and other executives arrange to borrow $40 billion and buy the stock from Sandler's character at fair market value. Upon gaining control of the company, the new owners intend to break it up into little pieces and sell them off at a premium. The sum of the parts is worth more than the whole. By carving up the company, investors unlock the value of these assets and make a fat profit in the process.

Most readers would recognize this for what it is: efficient capital allocation. Potential buyers place different values on the corporate divisions of Blake Media. If a division is worth more to a potential buyer than it is in the hands of current owners, it should be sold. (The whole point of investing is to make money, whether by holding shares or selling them to a higher bidder.) What Sandler and others fail to realize is that these transactions are not zero-sum. Synergy makes them win-win.

My old Brooklyn neighborhood provides a clear example of synergy. The Century 21 department store was enjoying remarkable success while adjoining small retail stores were struggling. Century 21 needed room to expand, so it made deals with its neighbors to take over their spaces. Thanks to these deals, the small shop owners made more money than they could have on their own, but not as much as Century 21 expected to make using the same space.

In simpler terms, the land was worth more to Company A than Company B. Company A paid B some price below the value to A and above the value to B. Company A got a bargain, and Company B made an unexpected profit. Everyone is now better off.

Back to Mr. Deeds... Sandler's character does not believe in synergy. In fact, he does not believe in personal responsibility. He gets into fights and destroys people's property, then gives his victims a few thousand dollars to shut them up. In a misguided act of kindness, he gives away a priceless painting to a local bum, who manhandles it and destroys its value. (He also gives the bum a few bottles of booze.) In fact, Sandler's character wastes lots of money and wrecks lots of property. Whereas capitalism creates economic growth through win-win transactions, Sandler's less-than-zero-sum actions make everybody worse off.

But that's not the worst part. The movie perpetuates ignorance about basic economics and corporate finance. If the company is broken up, "virtually all of Blake's 50,000 employees are likely to lose their jobs." Think about that. Sandler's 49% stake was worth $40 billion. Then the whole company was worth more than $81 billion. That means each employee created $1.6 million in value on average. Compare that to other media companies, such as AOL's $725,000 per employee. Each IBM employee is worth less than half a million. So, why on earth would the industry's most valuable employees be kicked to the curb when their divisions are acquired by other profit-seeking enterprises?

Of course, that makes no sense. A media company has only two components: content and distribution. It depends on high quality people to create new content and get it in front of consumers. A media company is worth almost nothing without writers, journalists, editors, newspaper delivery truck drivers, etc.

The movie never bothers to explain why other companies are willing to pay such a handsome premium to acquire pieces of Blake Media. According to basic finance and economics, the deal would invariably lead to more wealth creation, greater economic growth, and ultimately higher employment across the economy. Sandler's character glosses over all of this to set up the classic Marxist dichotomy: profits versus people. By the end of the movie, Sandler gets his way, destroys billions in wealth, and then squanders his personal fortune in a manner that even upsets the Greens.

Sandler needs to be reminded how ignorant and harmful his ideas really are. Just as he was told in his earlier movie, "Billy Madison":

"What you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul."

Sandler is not alone in his quest to de-educate the theater-going public through anti-capitalist propaganda. Hollywood is full of movies with the same message. Danny DeVito played Larry the Liquidator in "Other People's Money." Larry made millions by restructuring poorly run companies. By the end of the movie, he had a change of heart and "realized" that the best thing to do for an inefficient manufacturing company would be to let it rot in the hands of incumbent management rather than serve the stockholders and the long term interests of the economy.

Michael Douglas played Gordon Gekko in "Wall Street." Gordon was a bad guy for being the only character in the whole movie who served shareholders' interests as required by law (completely separate from his insider trading and chicanery). On the other hand, Terrence Stamp's character, Sir Larry Wildman, was a nice guy for trying to save a company worth more dead than alive, squandering shareholders' money in the process. Charlie and Martin Sheen were the real heroes of the movie for putting the short-term interests of the employees ahead of all other considerations (even if that meant insider trading and chicanery). Just as Sandler "saved" Blake Media from being broken up (and enriching investors), the Sheens "saved" Bluestar Airlines from a similar fate, much to the detriment of the stockholders.

In the 2000 movie, "Boiler Room," all the bad guys got together to watch "Wall Street." They recited Gordon Gekko's "greed is good" monologue from memory. It seems Gekko is the Hollywood prototype for bad guys in finance. (There are many other shortcomings in "Boiler Room." For example, the owner of the pump-and-dump brokerage firm established a secret location to reestablish business in the event of a raid by the feds... The secret location is literally next door. Some secret.)

I do not object to Sandler's movies because of the crass toilet humor. I like that part. (Remember, I get paid to write about South Park.) I do not even mind the blatant hypocrisy. Adam Sandler is a capitalist. (He makes about $20 million per movie.) Yet, he uses his fame to disparage capitalism. The hypocrisy is silly, but harmless.

However, I do object to the damage Sandler and his Hollywood peers are doing to the public. They are spreading misinformation and perpetuating ignorance about the underpinnings of the global economy. Capitalism has consistently outperformed all other economic systems because it allocates resources more efficiently. Yet, Sandler, DeVito, and the Sheen family have used their fame to advocate inefficient capital allocation.

High stock prices are not just a gift to the rich. More than half of all American families own stock in one form or another. Many other families rely on pensions that are funded with corporate stock. Even the pension funds of government workers rely on a healthy stock market. (I have personally prepared tax returns for the investment funds of the public school teachers of New York State.) Yet, Hollywood fails to grasp the positive aspects of equity markets.

Should we expect movies to educate us? Of course not. Entertainers entertain. Educators educate. We must be careful not to confuse the two.

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