Understanding Corporate Raider
On Websites like Investopedia or CFI it is always states that one of the main Instrument of corporate Raiders was to sell of Assets to "generate attractive returns", but I´m seriously confused about the phrasing of these statements. How does this actually increase Share-price? Is it, because of the sudden inflow of cash from the sale vs. the slow profits of the asset itself?
E.g. Carl Icahn´s takeover of TWA is always summarized as "he bought a controlling stake in the company, sold assets and left the company with a profit" and for me these explanations feel extremly shallow and empty. In this case I know he sold different flying rights to the competition, but from my current understanding this sale makes the company less competetive and shareholders should sell off shares and thus decrease the shareprice.
Paying down debt?
Shouldn’t this only increase value, if the wacc isn’t „Optimal“? If you only increase equity-% to do so, wouldn’t it just make your discounting rate higher and thus make the Company actually less worth?
Could have just asked me how I'm feeling
Every time I tell you that I don’t understand you, you just push me away…
Everyone always asks, "what is Corporate Raider?" and never, "How is Corporate Raider?"
The idea behind "coporate raiders" is usually one of these ideas: 1) the company is worth less than the sum of the parts or 2) sell assets to generate short term profits, or 3) the company is run inefficiently by managers who care more about keeping their safe cushy job than making big returns for shareholders or 4) borrow a lot of money and hope it works out. #1 and #3 genuinely create shareholder value. #2 or #4 is a bit harder to judge, but it's not *necessarily* bad.
Your Carl Ichan example is either #1 or #2.
1) Company is worth less than the sum of the parts -- lots of times a company makes both widgets and sprockets. (Or in your TWA example, they fly to both Florida and also California). Some investors believe in widgets but think sprockets are a bad bet so they'd pay a good price for the widgets business but won't value the sprockets business at what its worth. And some investors have the opposiate view. Solution: split up the company and sell the sprockets business. Value created! The competitor who only wants the sprockets business will pay full-value for it, and now you're left with only the widgets business and investors who want that will now be more attracted to the stock, raising the price. Arguably, this is the charitable explanation of what you were referring to in your example with Carl Ichan.
2) Sell assets to generate short term profit -- sometimes you can sell off the assets or stop investing in R&D or marketing or whatever, and that might be bad for the company long-term, but at least in the short-term, profits will go up, so you do it and then sell the company. People will always argue about whether this is smart ("closing an underperforming business" or "cost-cutting") or being stupid ("cutting investment in innovation and future growth"). It's usually not clear-cut. Arguably, this is the dark side of your Carl Ichan example.
3) Company is run inefficiently by managers who care more about their cushy jobs. You've seen the movie Wall Street, right? Just watch the "Greed Is Good" speech (it's on youtube). Buy the company and kick out those risk-averse managers
4) Borrow a lot of money and hope it works out. Borrow a billion dollars, buy the company, hope the business improves. If so, sell the company for two billion, pay back the debt (or better yet let the new owner pay off the debt) and keep the profit. If the business tanks, well, the company goes bankrupt but you're not personally liable for any of that money.
That was a way better explanation that I could have wished for, thanks a lot!
In the second example with less long term growth potential wouldn't its valuation go down and firms not pay a higher price for it?
It's hard for outsider investors to know the long term growth impact of (for instance) reducing the marketing budget or cancelling some R&D project that may or may not pay off in a decade. Heck, it's hard even for the CEO himself to know. It sure *sounds* bad to say you're cutting R&D spending, that sure sounds like something that might reduce growth prospects; but on the other hand, everybody who's every worked at a big company knows there's often lots of waste-of-money projects that could be eliminated entirely or at least still do just fine with less headcount. Maybe all that marketing money and R&D spending really *is* just waste and cutting it is a smart choice. Who can know for sure?
All the investors know for sure is that last year you spent $X and made $Y revenue, but this year you still made the same $Y revenue but spent 20% less expenses, so that's more profit, and obviously the CEO is doing a good job. Who knows if maybe there will be a long term revenue hit?
Facilis laudantium sed voluptatum eaque hic iure. Nulla et libero officiis. Accusantium est dolor quaerat voluptatibus dolorem quia. Assumenda voluptas reiciendis exercitationem ut minima nulla rerum.
Deserunt architecto explicabo id. Necessitatibus ipsum velit expedita consequuntur. Praesentium veniam omnis dolor neque. Et quas nam quod dolorem consequuntur et. Modi consequuntur esse veritatis ipsa pariatur omnis dignissimos exercitationem. Consectetur voluptate autem ipsam aut eligendi voluptatum soluta adipisci.
Sunt accusantium assumenda eum et molestiae id id sit. Ut deleniti tenetur dolorem consequatur totam quos. Iure in vel et. Vel tempora qui expedita eveniet ipsam. Consequatur aut non quia quis odit voluptatibus quam.
Rerum est nihil ut vel deserunt. Mollitia qui sit et inventore et dignissimos.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...