Corporate Raider

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 marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more 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.

Corporate-Raider

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Example of Corporate Raider

To illustrate, we can assume that a company whose share is trading at $3, but 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 buyoutsLeveraged BuyoutsLBO (Leveraged Buyout) analysis helps in determining the maximum value that a financial buyer could pay for the target company and the amount of debt that needs to be raised along with financial considerations like the present and future free cash flows of the target company, equity investors required hurdle rates and interest rates, financing structure and banking agreements that lenders require.read more 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.

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:

Advantages

The following are the advantages of being a Corporate rider.

Disadvantages

Below are the disadvantages of corporate rider.

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.

This article has been a guide to Corporate Raider and its definition. Here we discuss the motive of a corporate rider with example and the techniques to keep them away. We also discuss the advantages and disadvantages. You may learn more about our articles below on finance –