Corporate Raider - Explained
What is a Corporate Raider?
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Table of ContentsWhat is a Corporate Raider?What does a Corporate Raider Do? The Reasons Why Shareholders and Financial Investors Oppose Corporate RaidersAcademic Research on Corporate Raider
What is a Corporate Raider?
The term corporate raider is used to refer to an investor who purchases a large or huge number of a company's shares - especially when such stocks appear to be undervalued. A corporate raider usually receives significant voting rights (which results in control over the decision-making process) due to the large number of shares which he or she owns.
In some cases, if not most, corporate raiders use their greater voting rights to make changes to the structure or operations of the company, as well as make changes to leadership and management of the firm. The decisions seek to improve his or her personal returns on investments, which is the main reason for the stock acquisition.
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What does a Corporate Raider Do?
Corporate raiders mostly target small to failing firms in an attempt to expand them and then increase the value of their shares. They usually make use of different carefully thought out tactics to effect the modifications that they wish to see in the firm. Their tactics might include removing or replacing the board of directors to suit their needs, or even purchasing outstanding shares (shares which have not been released for active trading or holding) under the pretense of increasing the development of the firm and aiming for changes that are not currently achievable by the company.
In most cases, these outstanding shares are later sold back to other investors at higher prices than they were bought in an attempt to turn in substantial profits. Of course, the major aim of a corporate raider is to get higher returns by any means possible. Sometimes, it not rare to see corporate raiders entering into a company for the purpose of merging it or selling it out to another firm or organization that is interested in it.
This is something which such an individual can do if he or she feels that a merger, acquisition, or sale of the firm can turn in substantial profit for him or her. This action is usually a follow up to a former refusal to agree to a merger or sale by the former leadership of the firm, which the corporate raider see as lucrative or a prospect for high returns. In some cases, corporate raiders take action when they wish to see a certain company asset being sold to invest the value into business operations, or simply when they wish to unlock an asset for bolstering the growth of the firm.
In some cases, it includes the sales of office equipment and machinery, while in other cases, these individuals can go as far as turning a company branch into a franchise, or selling the building off, especially in cases where the returns provided from the use of such buildings exceeds the income which they generate for the firm. Sometimes, a corporate raiders aim is to reduce the amount of employees in a company as a way to increase the gains of the firm, which subsequently leads to an increase in the value of the firm at the point of sale.
The Reasons Why Shareholders and Financial Investors Oppose Corporate Raiders
Although it is possible for corporate raiders to improve the health of a company, the main reason why they take such actions cannot be far-fetched. Managers and members of board often oppose the idea of corporate raiding as they simply want a system of management where their actions are not altered for the goals of a single individual or groups of individuals with the intention of engaging in practices that do not serve in the best interest of the firm or other shareholders.
To avoid the idea of corporate raiding, many companies have employed different tactics to prevent and thwart any plans that an individual might take to carry out such practice. These tactics include shareholders rights plan, supermajority voting (where the vote is based on numbers and not the shares value owned by each shareholder), staggered boards of directors, buybacks of shares from raiders at a higher price (a predetermined price stated in a contract before selling shares to suspected raiders), uncalled increase of company debts to make the firm undesirable to potential acquiring companies and buyers.
In the corporate raiding world, it is not possible to quickly forget Carl Icahn who employed hostile takeovers which included making a company private, compelling a spin-off, requesting for a change in the members of the board of directors (a full sweep), or calling for a forced transfer of securities in making a fortune.
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