Corporate raid
|
|
A corporate raid is a business term, sometimes also referred to as breaking a company. It 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 cap. 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 "float" or "reserves" are larger than the market cap or a real estate company or trust whose real estate could be sold for a larger sum than what the market cap of the company is.
| Contents |
History
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 takovers. 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, chairs, computers and espresso machines.
Analysis
Opponents of the corporate raid argue that this typically occurs only to 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 by 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 lesser 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 fiction
Just prior to this time 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. Jerry Sargent 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 Monty Python's 1983 film The Meaning of Life.