Corporate Raider

By Best Tài Chính

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 besttaichinh.com 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 besttaichinh.com 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 directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more, 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 PillPoison PillPoison pill is a psychologically based defensive strategy that protects minority shareholders from an unprecedented takeover or hostile management change by increasing the cost of acquisition to a very high level and creating disincentives if a takeover or management changes happen in order to alter the decision maker’s besttaichinh.com more 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 sharesBuyback Of SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the besttaichinh.com more 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 knightWhite KnightA white knight is a friendly investor who acquires the company with the help of the company’s board of directors or top-level management at a fair price so that the company can be protected from a hostile takeover attempt by another potential buyer or from besttaichinh.com more (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 ESOPESOPEmployee stock option plan (ESOP) is an “option” granted to the company employee which carries the right, but not the obligation, to buy a promised number of shares at a pre-determined price (known as exercise price). read more, employees hold ownership of the company.
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Advantages

The following are the advantages of being a Corporate rider.

  • Such hostile takeoversHostile TakeoversA hostile takeover is a type of acquisition of a target company by an acquiring company in which the target company’s management is not in favour of the acquisition but the bidder still uses other channels to acquire the company, such as acquiring the company through tender offer by directly making an offer to the public to buy the shares of the target company at a pre-specified price that is higher than the prevailing market besttaichinh.com more 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 managementCash ManagementCash Management refers to the appropriate collection, handling, & disbursement of cash for ensuring financial stability & avoiding insolvency risk. read more, 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.
  • AcquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business besttaichinh.com more may be sought for tax benefits as such takeovers can increase tax shieldTax ShieldTax shield is the reduction in the taxable income by way of claiming the deduction allowed for the certain expense such as depreciation on the assets, interest on the debts etc. It is calculated by multiplying the deductible expense for the current year with the rate of taxation as applicable to the concerned besttaichinh.com more 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 investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment besttaichinh.com more.
  • Replacement of experienced senior executives, with carpet begging speculatorsSpeculatorsA speculator is an individual or financial institution that places short-term bets on securities based on speculations. For example, rather than focusing on the long-term growth prospects of a particular company, they would take calculated risks on a stock with the potential of yielding a higher besttaichinh.com more 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.
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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.

Recommended Articles

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 –

  • Corporate Bonds Definition
  • Friendly Takeover
  • What is Dawn Raid Takeovers?
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