Business, Legal & Accounting Glossary
A corporate raid (sometimes referred to as breaking a company) is a business term that describes a particular type of hostile takeover in which the assets of the purchased company are immediately sold off (business liquidation). The target company essentially disappears in the process.
This can be a profitable exercise if the company holds disposable assets or liquid investments that are valued higher than the company’s current market capitalization. Examples would include companies holding valuable land or equipment, while their stock price is too low due to market factors. After taking a “hit” on their stock price for whatever reason, companies can become targets for a leveraged buyout.
Examples of this is an insurance company whose “reserves” or “assets” are larger than the company’s overall value, or a real estate company whose property holdings could be sold for a larger sum than the company itself.
Corporate raids became the hallmark of a handful of investors in the 1970s and 80s who built up large lines of credit and were able to purchase huge companies for little or no cash, often through the issuance of junk bonds. These corporate raiders gained a reputation for destroying a number of well-run companies, although this may be somewhat overstating the issue.
However, the era of the corporate raider appears to be largely over. In the later 1980s, the famous raiders suffered from a number of bad purchases that lost money (for their backers, primarily) and the credit lines dried up. In addition, corporations became more adept at fighting hostile takeovers through mechanisms such as the poison pill. Finally, in the 1990s the overall price of the American stock market increased, which reduced the number of situations in which a company’s share price was low with respect to the assets that it controlled.
After the dot-com bubble burst, there was another wave of corporate takeovers. This time, they were called “vulture capitalists” (a pun on venture capitalists). They bought up dot-com companies in which the stock was very low and then sold out the inventory like desks, Aeron chairs, computers and espresso machines.
Opponents of the corporate raid argue that this typically occurs only with well-run companies who are successfully managing their money. In addition, they argue that corporate raids cause large economic disruption and create unemployment as factories are sold off and closed. Proponents of the corporate raid argue that companies which have huge assets and low stock prices are not managing their money well and should either attempt to regain market confidence (thereby boosting their share prices) or else liquidate some of their assets and return the money to their shareholders.
Some believe that one side effect of the corporate raiding era is that companies are much more defensive, which many argue is not a good thing for the economy. Others argue that corporate raids prevent corporate managers from becoming too complacent and serve to redistribute capital from weaker sectors to more productive sectors of the economy. In particular, some argue that the apparent superior performance of American companies in the 1990s in comparison with German or Japanese companies arose because the latter companies are protected from corporate raids.
In the late 1980s, the corporate raid became a hot topic in the United States, to the point where a fictionalized corporate-raiding character named Gordon Gekko (played by Michael Douglas) formed the basis of the popular movie Wall Street. In the movie, Gekko intended to take control of an airline in order to profit from its over-funded pension, with complete disregard to the loss of jobs or other people factors involved in the deal. Jerry Sterner wrote a play called Other People’s Money which in 1991 was made into a movie starring Danny DeVito as “Larry the Liquidator.” Corporate raiders of a sort were also featured in the 1983 film Monty Python’s The Meaning of Life. Richard Gere played a character in the film Pretty Woman who built up his wealth via corporate raids.
A corporate raider is an entity that attempts to take control of another company with a hostile takeover offer or other means such as a proxy fight.
A company under the gun may be rescued by a white knight or may pay greenmail to make a raider go away.
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This glossary post was last updated: 29th November, 2021 | 0 Views.