Corporate Raider Definition
Corporate Raider is a type of investor who benefits by buying a large stake in an undervalued company either with a motive to influence the decision-making process of the company or to sell it for a profit. The most common example is a change of the board of directors, which will help them in influencing the vital decisions of the company.
The Motive of the Corporate Raider
The basic motive of a corporate raider is to make such pivotal changes in the company so that the overall reputation of the company gets improved, which in turn impacts the share price of the company in the stock market positively. When the shares are sold at a premium price, they earn a handsome profit for themselves. A corporate raider who accumulates more than 5% of the company’s outstanding shares must register with SEC.
Example of Corporate Raider
To illustrate, we can assume that a company whose share is trading at $3, but the company has $5 a share in cash with no debt. In this scenario, the corporate raider will buy the shares in bulk to get control over the entity. Once it has a major stake, it would distribute $5 in cash, per share, to all its shareholders. They can earn decent gains by seeking such companies that are leveraged buyouts and benefit the raider well.
One of the finest examples of a corporate raider is Carl Celian Icahn, the founder and controlling shareholder of Icahn Enterprises. In 1980, Carl Icahn profited from the hostile takeover of American airline TWA. He bought 20% of Trans World Airline’s stock and made a good fortune of $469 million. He converted the TWA company to a private company, changed the board of directors, and finally called for the divestiture of assets. This deal made the airlines bankrupt, but the Corporate raider enriched himself with decent personal gains.
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Another example is Victor Posner, who acquired a major stake in DWG Corporation and used it as an investment vehicle that executed a takeover of other corporations (like Sharon Steel Corporation).
How to Keep Corporate Raiders Away?
Looking at the evil impact on the company by the indecisive acts of corporate raiders, the companies decided to follow some stringent counterbalance. Some of the techniques to counteract on the threats to corporations are:
- Poison Pills: Poison Pill is making the stock more expensive or selling the shares to existing shareholders at a discount.
- Supermajority voting.
- Staggered Board of Directors: Directors divided into a different class with a different serving period, to stagger elections
- Greenmail: Buyback of shares from the raider at a premium price, to protect the interest of the shareholders.
- Increase in Debt – A dramatic increase in the amount of debt on the company’s balance sheet.
- White Knight – Strategic mergers with a white knight (white knight mean a ‘friendly’ takeover by an individual or company at a fair consideration to save the company from being rude by unscrupulous bidders)
- ESOP: It is a tax-qualified retirement plan, which provides tax savings to the company and its shareholders. By establishing ESOP, employees hold ownership of the company.
Advantages
The following are the advantages of being a Corporate rider.
- Such hostile takeovers give an opportunity to rethink their business strategy so that they can improve their balance sheet and compete with the competitors in the market.
- Synergy or combinational gains result in economies of scale and efficiencies in cash management, so that the company, as a whole, gets the maximum benefit out of such takeovers.
- Acquisition by a corporate raider provides a chance to replace incompetent managers. It is because they get an opportunity to make a significant change in the Board of Directors, who make rational decisions for the company.
- The acquisition results in speculative gains to Corporate Raider, thus providing them psychic rewards or additional pecuniary compensation.
- Acquisitions may be sought for tax benefits as such takeovers can increase tax shield by giving an opportunity to depreciate the assets at a higher rate. Sometimes, such takeovers may also be financed with debt.
Disadvantages
Below are the disadvantages of corporate rider.
- Such Corporate raider’s strategies are not long-term strategies. Divisions are closed down or sold, people are sacked, and development is halted.
- Such takeovers naturally provoke anguish among the management as it is a result of cut-throat competition.
- They get the opportunity to flip the management of the corporation might use such powers to his personal gains, which might tarnish the image of the company.
- The sudden increase in the share price of the company and then subsequent booking of profits would result in a sharp fell, in no range of time, affecting the retail investors.
- Replacement of experienced senior executives, with carpet begging speculators or empire builders who have no knowledge of the businesses they are growing in, will destroy the long-term performance of the company.
- Corporate raider brings with him to harvest, divest, and load up the company with debt. The companies, before the acquisition, eliminate investments, sell off valuable subsidiaries, and assume substantial debt before a rider comes.
Conclusion
To conclude, one can say that corporate raiders can play the cards their way because the ultimate destiny of the company is in their hands. The corporate raider, who owns a huge stake in the corporation, can make either make personal gains or think for the benefit of the company as a whole. History has witnessed examples like Nelson Peltz, Saul Steinberg, Asher Edelman, etc. Some of them worked for the corporate image of the corporation while few made some decent gains to load their pockets. Corporate Governance laws and code of ethics tried limiting the role of a corporate raider.
In the end, we can say that they can be a boon as well as a bane to the corporation, depending upon the interest of the raider.
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