Corporate Raider

An investor that acquires a significant stake in an undervalued company with the intention of controlling it

Author: Arnav Chaudhary
Arnav Chaudhary
Arnav Chaudhary
Arnav Chaudhary is currently a CFA Level 2 Candidate who has expertise in financial modelling and data analysis. He has a baccalaureate in Economics and Mathematics from University Of Delhi.
Reviewed By: Matthew Retzloff
Matthew Retzloff
Matthew Retzloff
Investment Banking | Corporate Development

Matthew started his finance career working as an investment banking analyst for Falcon Capital Partners, a healthcare IT boutique, before moving on to work for Raymond James Financial, Inc in their specialty finance coverage group in Atlanta. Matthew then started in a role in corporate development at Babcock & Wilcox before moving to a corporate development associate role with Caesars Entertainment Corporation where he currently is. Matthew provides support to Caesars' M&A processes including evaluating inbound teasers/CIMs to identify possible acquisition targets, due diligence, constructing financial models, corporate valuation, and interacting with potential acquisition targets.

Matthew has a Bachelor of Science in Accounting and Business Administration and a Bachelor of Arts in German from University of North Carolina.

Last Updated:October 5, 2023

What Is a Corporate Raider?

A Corporate Raider is an individual who buys a large number of shares of a company that is possibly undervalued and, in return, uses their voting rights as a stakeholder to make new changes in the company that might increase its share value. Generally, the decisions are undertaken in the best interests of the company's management.

The main motive behind a corporate raider is to increase the share value and get some lucrative returns. Their work requires looking for a company's financial value, prospects, and business management that appear to be undervalued.

Measures usually undertaken by the corporate raiders are:

  • Downsizing the company's operations

  • Replacing the top executives

  • Liquidating the company

  • Buying a large stake just to merge or de-merge the company was difficult to execute earlier.

Their objectives are usually to divest the company divisions and operations to offset the losses the divisions of the company are making.

A corporate raider might be required to reduce the count of these divisions just to increase the company's profitability or to sell or merge the company in the near future.

Almost in all cases, after raiding the company, the corporate raider sells the shares at a premium to get a hefty amount of return to maximize their profits.

Key Takeaways

  • A Corporate Raider is an individual who buys a large number of shares of a company and, in return, uses their voting rights as a stakeholder to make new changes in the company.

  • The main motive behind a corporate raider is to increase the share value and get some lucrative returns.

  • Once a corporate raider buys the company, its fate is in the hands of the raider. It is all dependent on the buyer whether to just work in their best interests or in the best interests as a whole of the bought enterprise and their profit-making objectives.

  • Golden Parachute, White Knight, ESOP, etc., are the measures used by the targeted company to deter the attempts of corporate raiders.

  • Corporate raiders became famous during the 70s and the 80s. Famous names are: Carl Icahn, Victor Posner, Paul Bilzerian, Harold Clark Simmons, Kirk Kerkorian, and Asher Edelman.

Understanding Corporate Raider

Once a corporate raider buys the company, its fate is in the hands of this buyer. It is all dependent on the buyer whether to just work in their own best interests or of the best interests as a whole of the bought enterprise and their profit-making objectives.

Initially, the corporate raider uses tools such as a stock screener to look for undervalued companies. For example - They may look for a certain ratio, like the valuation of EBITDA, and compare them with peers in the same industry. 

Famous investors like Paul Bilzerian, Carl Icahn, and Sir James Goldsmith used to take companies public, reorganize the board of directors, and divest the various divisions of the business, thus making enough profits in a very short run.

It can be understood that the corporate raider might help in improving the profitability and the efficacy of the organization, but these reasons might be far-fetched.

Managers and board members often oppose such actions as it will lead to altering or influencing their decisions and affect their long-term vision as they may not align with corporate raiders. 

They think the acquirer is not working in the best interests of the firm and its shareholders. There are various upsides and downsides to a corporate raid, which are mentioned in the subheadings below.

History Of The Corporate Raiders

Corporate raiders became famous during the 70s and the 80s; some famous names are Carl Icahn, Victor Posner, Paul Bilzerian, Harold Clark Simmons, Kirk Kerkorian, and Asher Edelman

These people are considered the founders of many private equity firms today who used some of the tactics mentioned above to take over their targeted firms.

Victor Posner, one of the highest-paid executives of his time who was known to be notorious for stripping off assets, is considered the one who coined the term LBO or Leveraged Buyouts.

In 1966, Victor Posner bought a major stake in DWG Corporate, which he used as an investment vehicle to take over the firms over the whole of the United States.

Carl Icahn is known as one of the most ruthless corporate raiders after the hostile takeover of TWA (Trans World Airlines) in 1985 and later on, selling its parts to generate meaningful returns and setting off the debts used to acquire TWA.

Paul Bilzerian was indicted in 1989 for several violations and was found to be guilty, for which he spent 30 years in jail. He is known for the hostile takeover of companies like Hammermill Paper Company and Pay n Pack Stores for all cash and refused to take any greenmail in return.

Big corporations like Gulf Oil received a bid for a hostile takeover by T Boone Pickens, which led everyone into awe that a corporation like the size of Gulf Oil could even be raided. Later on, Gulf Oil was eventually sold to Chevron as a “White Knight Buyout” to avoid such a raid.

Elon Musk, the world’s richest man, bought the microblogging site Twitter as a result of a 44 Billion Dollar hostile takeover. Initially, the world’s richest man bought a 9.2% stake in the company, which made him the biggest shareholder in the company, but ended up buying the social media giant.

Advantages Of Corporate Raiders

There is no denying the advantages of the corporate raiders as well as their resulting upsides. Some of these are:

  • Acquiring a company may help improve the company's overall management by firing the managers in the underperforming divisions and restructuring the board members.

  • Acquisitions might help with the tax reductions as tax shields against assets that can now be depreciated at a higher rate.

  • These acquisitions might help in improving the health of the balance sheet and re-thinking certain strategies, thus helping in competing with the bigger or smaller competitors present in the market.

  • These corporate raiders provide capital gains to the buyer, thus helping with the profit-maximizing objective and getting some compensation in return.

  • Many times, these hostile takeovers help in providing disruptions in terms of methods, technology, and various other factors.

  • These corporate raiders help in increasing the intrinsic value of the outstanding shares of a company.

  • A company's overall reputation is improved with the corporate raiders as the new owner brings their goodwill to the company.

  • The company as a whole will benefit from it as a result of combinational gains, which leads to economies of scale, thus inducing more efficiency into the parts or to the corporation as a whole.

Disadvantages Of Corporate Raiders

With the upsides come the downsides. Corporate raiders brings the following disadvantages to the acquired corporation:

  • Increasing debt and divestment are expected after the corporate raiders as certain good-performing divisions might be offloaded, and debts would increase.

  • There might be a heavy tussle between the acquirer and the present management, thus affecting the overall organizational synergy.

  • Development is stalled, and people are fired as the corporate raiders do not think about the long-term growth perspective and often think about personal gains.

  • Experienced professionals are fired off who played a major role in increasing the overall efficiency and the efficacy of the business, thus affecting the long-term prospects of the business.

  • These corporate raiders lead to tarnishing the overall image of the company as their goal are oftentimes short-term in nature and profit-maximizing without thinking about the main operations of the corporation and their long-term interests along with their growth prospects.

  • It can lead to hurting the collective investor sentiments because the vision of the acquirers might differ from the investors.

  • In comparison to the retail investors, the institutional investors trade in a larger quantity and faster comparison; thus, the latter book profits and sells, leading to the stock price going down and eventually affecting the retail investors.

Bear Hug

A Bear Hug is a way of tightly hugging someone, rendering the person unescapable. Relating to the definition, it makes the management of the target company difficult to not accept the offer to buy them out.

Bear Hug is a strategy to buy the company at a premium to the market price of the share of a company to lure away its shareholders. It draws major attention to the company’s management and its share prices.

It is a type of acquisition where the acquirer provides an offer at a higher rate than the prevailing share price without considering the acquired company’s feedback. This type of offer is very lucrative, such that companies fall prey to the corporate raiders in this scenario.

Oftentimes, companies can not reject the offer made like this at a very high premium because they hold a trustful relationship with their shareholders, and to avoid lawsuits, they must act in their best interests.

Bear Hug may be a hostile takeover of the corporation, but unlike the other corporate raiders, it ends up in the favor of the target company’s shareholders in a better off position than they were initially before.

A corporate raider may try to use a bear hug to avoid any confrontation with the management of the target and oftentimes to limit the competition among the competitors to buy out the firm.

How To Keep Corporate Raiders Away?

Given the various drawbacks to these types of acquisitions, the management takes certain steps to thwart the attempts made by the corporate raiders. These techniques are:

  • Green-Mail: The corporation buys back the shares from the corporate raider at a certain premium to protect the interests of the shareholders of the business.

  • Poison Pill: Through this process, the management sells the shares at a discounted price to the shareholders or increases the value of shares to increase the company's valuation, making it difficult for the corporate raider to acquire the corporation.

  • Increase in debt: A staggering increase in debts in the balance sheet made it unfavorable and infeasible for the corporate raider to acquire the firm because of poor financial statements.

  • White Knight: A friendly takeover by a company to avoid any hostile takeovers at a very reasonable valuation.

  • ESOP: Employees of a company’s ownership through an ESOP plan. ESOP gives workers ownership interest in the company, and the interest works as in providing the company's shares to the employees.

  • Golden Parachute: It is an agreement between the company and the executives of the company where the company promises to give benefits to the employee in exchange for employment termination.

Despite all the measures, corporate raiders should be perceived as a necessary evil for the corporate society as they help in outcasting the poor management and incompetent professionals in the company.

Researched and Authored by Arnav Chaudhary | Linkedin

Reviewed and Edited by Justin Prager-Shulga | LinkedIn

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