Transforming a publicly-held company sometimes requires a corporate raider. Consider these tips on how to become a corporate raider who takes over a company to promote changes and increase shareholder value.
A successful corporate raider buys a majority of a company’s shares that they believe are undervalued. They acquire more voting rights as a result of their share purchases. They use those rights to insist on changes that they believe will cause the price of the company’s stock to increase in value.
What does a corporate raider do?
A corporate raider is an individual or a group of investors acting as a party that purchases a substantial position in a publicly held company. The shares purchased must be enough to assume a controlling position in the company and those shares are generally considered undervalued. As we discussed earlier, the corporate raider insists on changes that would lead to an increase in the value of the shares.
The corporate raider also might take assets that are valuable if they are worth more than its prospects and have them sold. To do so, a new board may be elected, the assets then sold and the proceeds distributed to the stockholders. The company would then be closed at the dissolution.
Is corporate raiding legal?
As described in the details of how to become a corporate raider, everything they do to acquire or sell off a company is legal. In many cases, a corporate raider takes over a troubled company. If they act appropriately, the corporate raider’s actions can be considered beneficial to the interests of the shareholders.
This is because the corporate raider’s activities are made in an effort to increase the value of the company’s shares for shareholders. Some corporate raider activities might be considered unethical if, for example, the company is put into bankruptcy to avoid paying off debt. That also might be done to avoid competition from others, but this would not be illegal.
What is hostile raider?
A corporate raider, also known as a hostile raider, is typically someone who is at the top level of an investment company. It also may be an entity that has a large amount of cash or can get access to it for the purchase of shares. A hostile raider is more concerned with earning a return on the investment made in a company, not actually managing a company.
A hostile raider generally has experience in corporate finance, with perhaps a master’s in business administration. They may be working for a company that is interested in these types of investments. They should have the drive and interest in working their way up the ladder and they should be able to see a deal like a company that is undervalued.
Do corporate raiders still exist?
Most people think of the movie Wall Street when they think of corporate raiders, the 1987 movie about a hostile raider. Although corporate raiders were more prevalent from the 1970s through the 1980s, they still exist today. They are just not as active as they used to be in those earlier decades.
The practice now when it comes to corporate mergers and acquisitions is typically through venture capitalism. Venture capitalism is a type of financing using private equity that is provided by a wealthy investor known as a venture capitalist. This can be an individual or a group of individual investors.
The difference between corporate raider vs private equity
The difference between a corporate raider and a private equity group is that a corporate raider is motivated by increasing the value of a company’s shares to enhance its investment. This can happen either through reorganization, M&A or asset divestiture. A private equity group offers financing for new and existing companies to earn a profit off their improved position and expansion.
But a private equity group may engage in leverage buyouts of a company, issuing a significant amount of debt to earn control of a company. With control of the company, a private equity group can reorganize it and later sell it.
How a Corporate Raid Works
There is one main motivation behind the actions of a corporate raider that are important to remember. That is, they are primarily interested in generating enough of a return on their investment to make a corporate raid worth it. In order to do this, it is important to find a target company that is undervalued.
This may be one of the most important skills of a corporate raider, the ability to identify truly undervalued companies. To do this, it is important to have a thorough understanding of a company’s financial condition and the competence of the management of the company. It is also necessary to understand the company’s business model and any future business opportunities.
For many corporate raiders, the process of identifying an undervalued company begins with the use of a stock screener. This process involves searching for companies that are publicly traded at a low valuation multiple. This can be determined by comparing a company’s stock price to that of its peers.
For example, a corporate raider would use a stock screener to find companies with stocks that are trading compared to their peers in the industry at a lower price-to-book multiple and enterprise value to EBITDA multiple. This is a way to identify if a company is considered undervalued, if all other factors related to the comparable companies are considered equal.
Pursing the takeover target
Once the corporate raider identifies the potential target company for takeover using the stock screener, then the hostile raider can dig into the details of the business. At this point, they will analyze all aspects and its financial condition. A review of the company’s financial statements should help confirm whether the low valuation multiples justify the conclusion that it is a worthy takeover target.
Once the corporate raider confirms that the target company is indeed undervalued, the corporate raid process starts. This most commonly occurs through the purchase of shares of an undervalued company, with the corporate raider buying them on the open market. The hostile raider buys enough shares to acquire a position that provides them influence and authority over the company.
Once that significant position is acquired in the company, the corporate raider begins the process of trying to increase the value of the company. Some steps they may take include selling off assets, replacing the membership of a poorly performing management team, or even getting the company ready for either a sale or a merger with another company.
What corporate raiders expect as they pursue takeover
In the corporate finance world, corporate raiders are often referred to as a necessary evil. Their activities are generally considered an important way to maintain efficiency in the capital markets. Just as spiders eat insects that can be harmful to their environment, a corporate raid can remove unhealthy companies from their industrial environment.
But many corporate raiders encounter resistance as they work on the hostile takeover. A sizable percentage of corporate raids fail, with as many as 40% stifled between 1997 and 2002. Common strategies used to fight a corporate raider are:
- Poison pill: This is a practice that allows shareholders of a publicly-traded company to buy more shares at a discount to the current market price. This allowance is used to help dilute the strength of a potential corporate raider.
- Golden parachute: This is a guaranteed payout to executives of a publicly-held company of a large compensation package if a corporate raider in the future attempts to terminate them.
- Crown jewel defense: This is a strategy used to make a publicly-held company less attractive to a potential corporate raider by retaining the ability to sell off valuable company assets needed for the takeover to be profitable.
Corporate raider examples
Let us consider an investor who has used a stock screener to identify a potential takeover target. The company’s market value appears to be trading significantly lower than its book value. As part of the corporate raider’s continued due diligence that involves reviewing the company’s financials, they conduct a discounted cash flow and multiples valuation that provides further insight into the company.
By taking these steps, the corporate raider determines that the target company should be trading at a considerably higher stock price. The hostile raider will then try to determine why the company is trading at such a relatively low market value. The raider discovers that the company’s historical profitability ratios are similar to its competitors.
However, the corporate raider’s due diligence discovers that the company’s executive management displays a lackluster track record when it comes to finding deals that will help expand the business. With this valuable information in hand, the corporate raider begins the process of buying a majority interest in the company.
Once the raider acquires enough company stock on the open market to obtain a majority interest, they can begin making moves to improve the value to shareholders. The hostile raider may use the company’s annual general meeting with shareholders to elect a new board. After the company’s management team is voted out and a new team is voted in that includes experienced veterans, the company’s stock price soars.
What was a hostile takeover by a corporate raider?
One of the more well known hostile takeovers was the one undertaken by Carl Icahn, a controversial and highly successful corporate raider. The movie Wall Street referenced earlier was based on the actions of Icahn, who once famously said, “You learn in this business: If you want a friend, get a dog.”
Icahn developed a reputation in the 1980s as a ruthless corporate raider. Icahn pursued Trans World Airlines in 1985, completing a hostile takeover and selling the airline’s assets. His actions provided a significant return on his investment in the airlines.
Corporate raider books
As you consider how to become a corporate raider, there are books that explore the work, including:
- The White Sharks of Wall Street: Thomas Mellon Evans and the Original Corporate Raiders
- King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
- King Icahn: The Biography of a Renegade Capitalist