What is a Corporate Raider?

A corporate raider is an investor who intends to generate a return by acquiring the shares of existing shareholders in order to take control of a public company and enhance its value. They target undervalued companies that (they believe) can be redirected to enhance their valuations. For example, they may want to sell off underperforming subsidiaries, close offices, centralize functions, reduce headcount, or replace managers who are not doing a good job of running the business. Or, they may have an interest in merging the firm with another business in order to generate a higher valuation for the combined business.

An entity that engages in these activities is only considered a corporate raider if its initial advances to the target’s board of directors are rejected; at this point, the prospective buyer is considered to be engaging in a hostile acquisition.

When a Corporate Raider Will Strike

A corporate raider is more likely to appear on the scene when a business has a recent history of underperforming, which has led to a decline in its stock price. In this situation, the raider can buy shares at a relatively low price, which reduces its downside risk. This also makes it easier for the raider to gain the approval of other investors, who may have become frustrated with the poor performance of the business.

Corporate raider takeovers are especially common when interest rates are low. This allows a raider to invest only a small amount of its own capital in a takeover, while using debt provided by banks to fund the remainder of the stock purchases. The raider then has the prospect of a substantial return on its invested funds, simply because it did not have to invest much in the deal.

How to Buy Off a Corporate Raider

Many raiders are bought off by targeted businesses, which agree to sell their shares for an inflated price in exchange for not buying any more of the firm’s shares for a predetermined period of time. This action is known as greenmail. Under a greenmail arrangement, the raider earns a profit on the inflated repurchase price, while the target company is now in a worse financial position, because it worsened its debt level in order to buy back the shares. As a result, the raider goes away, while the existing management team of the target company remains in charge.