What Is Corporate Raiding (Explained: All You Need To Know)

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What Is Corporate Raiding

Corporate raiding refers to when an investor acquires a large stake in a publicly-traded company with the intention of changing the management of the company.

Corporate raiding can also refer to individuals or companies buying enough shares to acquire a controlling interest in a public company when the company is undervalued in the market.

Typically, the main objective of a corporate raider is to become a shareholder with substantial voting rights allowing it to bring changes in how the company is doing things.

Corporate raiders may want to replace top executives in the company, have the company divest non-profitable divisions, downsize operations, or even liquidate the company.

The measures desired by corporate raiders are generally against the wishes and desires of the target company’s management team.

Between the 1970s and 1990s, there were many instances of corporate raiding in the United States.

Ultimately, many large publicly-traded entities adopted measures to fight against corporate raidings, such as poison pills, golden parachutes, and various other anti-takeover mechanisms. 

Keep reading as I will further break down the meaning of corporate raiding and tell you how it works.

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How Does Corporate Raiding Work

Corporate raiding refers to an investor’s strategy to acquire a significant voting interest in a company that it considers undervalued.

The corporate raiding process starts with the investor analyzing the performance of publicly-traded companies and identifying those that it considers undervalued.

Investors can use different methods to identify undervalued companies, such as analyzing financial ratios, looking at the management team’s experience, assessing the company’s future plans, etc.

Typically, a company will be considered undervalued when the company’s valuation multiple is significantly lower than its competitors and peers.

Once the investor identifies the undervalued company, it will start buying voting stocks on the open market.

The corporate raider’s objective is to buy enough voting shares so it can eventually influence the company’s management team and operations.

With enough voting power, the corporate raider can potentially dismiss the current management team, influence the company’s operations to downsize, liquidate non-core business units, and so on.

If the corporate raider is successful in making positive changes in the company, the value of its investment in the target company will go up significantly resulting in important profits.

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Corporate Raiding Defenses

Over the years, public companies have adopted measures to protect themselves from corporate raiders.

One of the most common corporate raiding defenses is the adoption of a poison pill.

With a poison pill, the target company allows its current shareholders to buy more shares at a discount relative to its market value.

By having more shares issued to its existing shareholder base, the company makes it more difficult for a corporate raider to acquire a controlling interest or substantial voting power to influence the company’s board and management.

Another measure that is used by companies is to offer its top executive team golden parachutes in case they are terminated.

If a company has a generous golden parachute offered to its top executives, the corporate raider will have to factor in the large executive payouts in its overall acquisition cost.

In extreme cases, the target company may simply decide to sell off some of its assets so the company becomes less attractive to the corporate raider.

This measure can be risky for the target company’s board as they must ensure that the decision to sell their assets is in the best interest of the shareholders.

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Views On Corporate Raiding 

The name corporate raiding has a negative connotation to it as target companies generally see it as disruptive to their business.

From the target company’s perspective, corporate raiding is viewed negatively as the current management team views the corporate raider as a bad influence on the company.

Since the corporate raider is there to influence changes in the company’s operations or even replace the top executives, the target company’s management team views corporate raiders as hostile stakeholders.

Top executives will not only need to deal with the proper management of the company but they must also deal with the influence and control exercised by the corporate raider.

On the other hand, the market may see corporate raiding differently.

When an investor acquires a significant position in an undervalued company, the market views this as a good opportunity for the company to adopt positive measures to raise its value.

More and more market participants view corporate raiding as a “necessary evil”.

Companies faced with the risk of having to deal with corporate raiders will have the incentive to run their company more efficiently to avoid being undervalued in the market.

Ultimately, this is beneficial for the company shareholders.

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Example of Corporate Raiding

In the United States, there are many notable corporate raiders such as Louis Volfson, Carl Icahn, T. Boone Pickens, and Asher Edelman.

For example, Carl Icahn was seen as a ruthless corporate raider when he took over Trans World Airlines (TWA) in 1985. 

He bought TWA using debt and then sold off TWA’s assets to pay off its debt.

The asset-stripping strategy he used earned him large profits.

Another example of a corporate raider is T. Boone Pickens attempted to take over Gulf Oil in 1984.

This hostile takeover bid was quite shocking to the market as Gulf Oil was a very large corporation that fell victim to corporate raiding.

Gulf Oil ended up selling to Chevron who acted as a White Knight preventing T. Boone Pickens from successfully raiding the company.

Other examples of corporate raiding are Paul Bilzerian’s takeover bids on Cluett Peabody & Company, Allied Stores, and Stinger Corporate.

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Takeaways 

So there you have it folks!

What does corporate raiding mean in business?

In a nutshell, corporate raiding is the practice of acquiring a controlling interest in an undervalued publicly-traded company with the intention of influencing the company’s management and operations.

The corporate raider’s objective is to buy a company’s stock at a low price, influence the company’s operations so the company’s valuation goes up, and sell.

The corporate raider can also acquire an undervalued company to then strip it of its assets allowing the investor to earn important returns.

Typically, company managers will oppose the actions of corporate raiders as they view the raider as a single shareholder acting in its sole interest as opposed to the interest of the entire company.

However, the market may see corporate raiding activities as beneficial (or a necessary evil) forcing company managers to perform well.

Now that you know what corporate raiding is all about and how it works, good luck with your research!

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