Lexicon
What is a corporate raider?
What is a corporate raider? An investor who buys enough stock to change a company’s future. They’re often motivated by a desire for maximum return.
Good corporate raiders are experts in their field.
They know how to spot underperforming companies, and they know how to gain control of them, and they know how to profit from this chain of events.
Usually, corporate raiders are enough of a threat for companies to have defence tactics ready, so boards need to know more about them.
What is a corporate raider?
It’s an investor who purchases enough shares in a company to be in a position of control. After that, they begin to push for changes, some of which can be drastic.
What’s the motive?
High returns. Corporate raiders will nearly always focus their efforts on companies they think are undervalued. They will also believe that their ideal changes to the company will increase that value.
When the value increases enough, the raider can sell their shares for a profit.
Are corporate raiders bad news for boards?
On balance, the answer is usually yes. There are some advantages, which you can find at the bottom of this article, but for now, let’s focus on why they can be bad news:
- A raider’s number one goal is nearly always maximum returns, so they will do whatever they feel is necessary to make that happen.
- Raiders can introduce significant changes to the board and management as soon as they have control. In reality, this should be expected. A raider who believes a company is undervalued will likely pin the blame on the people at the top.
- Raiders think short-term. Their actions may hurt the company’s prospects in the long term, but it won’t matter to them; they’ll have already sold their shares.
- Falling victim to a corporate raider is not good for a corporate reputation. Other potential investors will likely stay away from a company they now think is undervalued and in the middle of a chaotic period.
Can companies combat a corporate raider?
Yes, they can, and there are always several established strategies for doing so.
- The company can pursue the poison pill strategy, discounting the price of shares and encouraging other shareholders to buy them, giving them more control.
- The company can use the golden parachute strategy to arrange lucrative compensation packages for dismissed executives.
The company could also pursue a crown jewel strategy, selling off significant assets to devalue the company, making it a less attractive purchase when the raider wants to sell.
And the advantages?
The one advantage of corporate raiders is that they don’t always overhaul the board and management. Their changes could be less severe.
In those cases, while the changes might still be hard to deal with, a raider’s presence may allow for a re-think in company strategy – a chance to analyse what the company is doing right and wrong.
After all, an expert believes it to be undervalued. That opinion will rarely arise out of nothing.
In summary
What is a corporate raider? It’s an investor who acquires enough control in a company they think is undervalued. After making any and all changes they deem necessary, they will sell their shares for profit.