Corporate Raiding refers to a strategy in mergers and acquisitions where an individual or company acquires another company (the target) with the primary intent of selling off its valuable components, such as assets, divisions, or subsidiaries, to generate significant profit. This often involves breaking up the targeted company and liquidating parts that can fetch substantial market prices.
Definition
Corporate Raiding involves the acquisition of a company for the purpose of selling its valuable components individually for profit. This tactic is frequently employed by investors seeking to exploit undervalued or underperforming companies by dismantling them and monetizing their constituent parts.
Key Elements
- Acquisition: Acquiring the target company, typically through the purchase of a controlling stake.
- Asset Disposition: Identifying and selling off valuable assets or divisions of the acquired company.
- Profit Realization: Generating profit from the sale of the assets.
Historical Context
Corporate raiding became prominent during the 1980s, a period marked by high levels of mergers and acquisitions activity in the United States. High-yield bonds, or “junk bonds,” often financed these raids, allowing raiders to leverage significant sums of money for acquisitions. Prominent figures in this era included Carl Icahn and T. Boone Pickens, who were known for their aggressive takeover strategies.
Examples
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Carl Icahn and TWA: In the 1980s, Carl Icahn acquired Trans World Airlines (TWA). He subsequently sold off many of the company’s valuable assets, including its profitable routes, to pay off the debt incurred in the takeover and ultimately to realize personal gain.
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KKR and RJR Nabisco: Another notable example is the acquisition of RJR Nabisco by Kohlberg Kravis Roberts (KKR) in 1989. This leveraged buyout remains one of the most famous in history, where parts of the company were sold off to repay the massive debt used to fund the takeover.
Implications
Corporate raiding can have significant implications:
- Shareholders: Shareholders of the target company may benefit in the short term through the premium paid for their shares.
- Employees: Often face layoffs or uncertain job futures as the acquired company is dismantled.
- Industry: Can lead to increased competition and efficiency but may also undermine longer-term investments and stability.
Comparisons
- Hostile Takeover: Both tactics involve acquiring a target company, often against its will. However, a hostile takeover does not necessarily aim to dismantle the company.
- Leveraged Buyout (LBO): Usually involves the significant use of debt to acquire a company with the goal of improving its profitability, sometimes followed by selling parts of it — similar to corporate raiding but typically with a more strategic long-term improvement focus.
Related Terms
- Mergers and Acquisitions (M&A): The umbrella term for strategies involving the buying, selling, and combining of companies.
- Asset Stripping: The process of selling off a target company’s assets for profit, often seen in corporate raiding.
- Leveraged Buyout (LBO): The acquisition of a company using a significant amount of borrowed money.
- Hostile Takeover: The acquisition of a company against the wishes of its management.
FAQs
Is corporate raiding illegal?
Why do companies engage in corporate raiding?
What are the risks associated with corporate raiding?
References
- Gaughan, Patrick A. “Mergers, Acquisitions, and Corporate Restructurings.” John Wiley & Sons, 2017.
- Burrough, Bryan, and John Helyar. “Barbarians at the Gate: The Fall of RJR Nabisco.” HarperBusiness, 2009.
- Icahn, Carl. “King Icahn: The Biography of a Renegade Capitalist.” Henry Holt & Company, 2001.
Summary
Corporate Raiding is a high-stakes financial strategy where an acquirer targets a company with the intent to sell off its valuable parts for profit. While it can offer substantial returns, it also comes with significant ethical and economic implications, affecting not just shareholders but also employees and markets at large. Understanding the nuances and historical background of corporate raiding can provide deeper insight into its role within the broader context of mergers and acquisitions.
