Corporate Raider
An individual who buys a large number of shares of a company
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 management of the company.
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 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 raider might require to reduce the count of these divisions just to increase the profitability of the company or to sell or merge the company in the near future
Almost in all the cases after raiding the company the raider sells the shares at a premium to get a hefty amount of return to maximize their profits.
Understanding The Corporate Raids
Once a 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 own best interests or of the best interests as a whole of the bought enterprise and their profit-making objectives.
Initially, the raider uses tools such as a stock screener to look for undervalued companies. For example - A raider may look for a certain ratio, like the valuation of EBITDA, and compare them with the 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 raider might help in improving the profitability and the efficacy of the organization but these reasons might be far-fetched.
Managers and the 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 raiders.
They think the acquirer is not working in the best interests of the firm as well as its shareholders. There are various upsides as well as downsides to a corporate raid which are mentioned in the subheadings below.
History Of The Corporate Raiders
Corporate Raids became famous during the 70s and the 80s, Carl Icahn, Victor Posner, Paul Bilzerian, Harold Clark Simmons, Kirk Kerkorian, and Asher Edelman to name a few of the famous corporate raiders.
These people are considered the founder 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 sold to Chevron as a "White Knight Buyout" eventually 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 Raids
There is no denying the advantages of the raids as well as their resulting upsides
Acquiring a company may help in improving the overall management of the company by firing the managers in the underperforming divisions as well as overall 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 raids 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 raids help in increasing the intrinsic value of the outstanding shares of a company.
The overall reputation of a company is improved with the raids 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 Raids
With the upsides come the downsides. Corporate Raiders brings the following disadvantages to the acquired corporation
Increasing debt and divestment are expected after the raids 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 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 as well as the efficacy of the business thus affecting the long-term prospects of the business.
These corporate raids 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 as well as faster comparison thus the latter ones book profits and sell leading to the price of the stock going down and eventually affecting the retail investors.
Bear Hug
Bear Hug is the way of tightly hugging someone such that 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 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 raids 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.
Actions To Safeguard Against The Corporate Raids
Given the various drawbacks to these types of acquisitions, the management takes certain steps to thwart the attempts made by the corporate raiders
Green-Mail: The corporation buys back the shares from the 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 valuation of the company so that it will become difficult for the raider to acquire the corporation.
Increase in debt: A staggering increase in debts in the balance sheet made it unfavorable and infeasible for the 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, the interest works as in providing the shares of the company 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.
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 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 of 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 raids.
Corporate Raids became famous during the 70s and the 80s, Carl Icahn, Victor Posner, Paul Bilzerian, Harold Clark Simmons, Kirk Kerkorian, and Asher Edelman to name a few of the famous corporate raiders.
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