Raiders: What They are, Methods, History

What Is a Raider?

A raider is an investor that seeks to squeeze out a quick profit from failing and undervalued companies. Armed with deep pockets and plenty of financial backing, they buy big enough stakes in these companies to give them significant voting rights and then use this influence to take new measures to increase shareholder value, such as replacing top executives, restructuring the company, or liquidating it.

Modern-day raiders prefer to call themselves activist investors.

How a Raider Works

Raiders look to gain a controlling interest in companies that are struggling, vulnerable to hostile takeovers, and trading below intrinsic values. Typically, the goal is to make a quick buck, rather than attempt to unlock long-term value by turning around operations and making the company more efficient; think Gordon Gekko in the popular film Wall Street.

These private equity firms, hedge funds, and wealthy individuals purchase a big enough share of a company's voting rights to influence its board of directors (B of D) and put public pressure on its management to exert the changes they want. As most of the companies they target are underperforming, raiders often succeed in drumming up support from other shareholders, too, increasing their sway and the likelihood that their demands to swiftly line investors’ pockets will be met.

Raider Methods

Raiders may employ a variety of tactics to affect the changes they desire and tend to have well-defined exit strategies. Game plans include using their voting power to install handpicked members to the B of D, positioning the company for a sale or merger, or breaking up the target company and selling off its assets.

Consider a company with a market value of $100 million, no debt, and $25 million in cash; or an enterprise value of $75 million. If the market value of the company's tangible assets were $200 million, a raider might be tempted to mount a hostile bid in order to capture the huge gain that could be realized by selling off the assets.

Another approach occasionally used to make a quick buck is introducing debt-funded share buybacks. Alternatively, raiders may buy outstanding shares under the pretense of pushing for changes that current leadership is not amenable to. At that point, they can then offer to sell back those shares at a premium price in order to turn a profit for themselves.

History of Raiders

Raiders were particularly common in the United States from the 1970s to the 1990s, before publicly traded corporations adopted takeover defenses. Back then, raiders became famous for buying companies and dismembering them, securing a tidy profit while simultaneously leaving many workers unemployed.

Nowadays, raiders, in the guise of activist investors, have sought to clean up their reputation by engaging in different tactics to their predecessors. That said, it is still common for some private equity firms to engage in asset stripping, taking a company private, recapitalizing it with additional debt, selling-off its most liquid assets, and raiding its coffers, in order to pay extra dividends to shareholders.

Despite the continued controversy that surrounds many raiders, in recent years their role in corporate America has been recast as a necessary evil that serves as a counterbalance to poor management at publicly-traded companies.

Proponents argue that they make capital markets more efficient by improving companies that are failing. These arguments are fueled by research showing that the highest combined degrees of activist ownership post higher returns on invested capital (ROIC) and outperform the broad stock market by significant margins.

Special Considerations

Raiders are generally disliked by company managers. Those in charge don’t want to be told how to do a better job, nor face the disruptions and media attention that raiders generate. In most cases, their objective is to think long-term about how to improve the business they are in charge of, unlike raiders, who usually aren’t interested in sticking around and want quick results.

To avoid ugly debates, ceding control, and seeing the business they helped nurture for long-term success potentially be run into the ground, companies have developed a variety of strategies to thwart the advances of raiders. They include shareholders' rights plans (poison pills), supermajority voting, staggered boards of directors, buybacks of shares from the raider at a premium price (greenmail), dramatic increases in the amount of debt on the company's balance sheet, and strategic mergers with a white knight.