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Corporate Raider

An individual or a party that purchases a substantial position (enough to gain a controlling position) in an undervalued company

What is a Corporate Raider?

A corporate raider is an individual or a party that purchases a substantial position (enough to gain a controlling position) in a company that is deemed undervalued. In other words, a corporate raider is an individual that takes control (commonly through a hostile takeover) of an undervalued company.

 

Corporate Raider

 

How It Works

The main motive behind a corporate raider is to generate an attractive return for their investment. As such, corporate raiders scout for companies that are deemed undervalued. Identifying an undervalued company requires a deep understanding of, among other things, a company’s current financial position, the management’s competence, business model, and future business prospects.

A starting point to identifying an undervalued company can be through a stock screener and looking for companies that are trading at a low valuation multiple (comparative to peers). For example, an investor can use a stock screener to identify companies that are trading at a lower price-to-book multiple and enterprise value to EBITDA multiple to peers.

All else equal, if the valuation multiples of the company in question are materially lower than its peers, it is generally considered undervalued. Thereon, the corporate raider will dive into analyzing the business and its financial statements to determine whether the low valuation multiples are justified.

If the corporate raider believes that the company is undervalued, he or she will begin the raid process. The most common method that raiders use to acquire an undervalued company is by purchasing shares on the open market.

Upon acquiring an undervalued company, the corporate raider will attempt to increase the value of the company by replacing its poorly performing management, divesting assets, or positioning the business for a sale or merger. An illustration is provided below:

 

Corporate Raider - How It Works

 

According to experts, corporate raiders make capital markets more efficient by identifying underperforming companies and improving them. As such, corporate raiders are commonly referred to as a “necessary evil” to counterbalance underperforming companies.

 

Common Tactics to Deter Corporate Raiders

The most common tactics that are used to deter corporate raiders include:

  • Poison pill: Allowing shareholders to buy more shares at a discount to the current market price
  • Golden parachute: A large compensation package guaranteed to company executives upon termination
  • Crown jewel defense: Selling off company assets to make the company less attractive

 

Example of a Corporate Raider

An investor uses a stock screener and identifies a company whose market value is trading significantly below its book value. The investor conducts further due diligence, conducting a discounted cash flow and multiples valuation on the company, and concludes that the company should be trading at a significantly higher value.

In determining the rationale for the low market value of the company, the investor finds that its historical profitability ratios are comparable to competitors, but that the company’s management demonstrates a poor track record in sourcing deals to grow the business.

As such, the investor acquires a majority interest in the company by purchasing shares on the open market. At the company’s annual general meeting, the investor votes out the current management team and reconstitutes the management team with seasoned veterans. On this news, the company’s share price skyrockets.

 

Carl Icahn – A Notorious Corporate Raider

In the 1980s, prominent American businessman Carl Icahn developed a reputation for being a corporate raider through his hostile takeover of Trans World Airlines (TWA). In 1985, Carl Icahn performed a hostile takeover of the airline and sold the company’s assets to generate a substantial return on his investment.

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Flip-Over Strategy
  • Market to Book Ratio
  • Return on Investment (ROI)
  • Pre-Offer Defense Mechanisms

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