The rebranding of corporate raiders

They’re the bane of board members and a lifeline for shareholders, yet there has been a rise fall and revival of corporate raiders

Carl Icahn, one of the most famous corporate raiders 

Back in the mid-1990s, The New York Times was left wondering where all the “much-feared and often reviled” corporate raiders of the 1980s had gone. But these marauders of corporate America never really disappeared. Instead, they underwent a dramatic rebranding. Reinventing themselves as bastions of the boardroom, shedding their villainous characterisation in favour of the more attractive tagline of ‘activist shareholder’.

This transformation was not simply superficial, however, with this once maligned group now garnering favour from those that despised them. The corporate raider is now seen as a necessary evil who serves as a counterbalance to poor management at publically traded companies whose balance sheets have become skewed.

To pay back his debtors, Icahn gutted Trans World Airlines, stripping it of its most valuable assets

World Finance takes a look back at the Wall Street predators turned corporate anti-villains in order to see how vast fortunes were made and how this class of investor has gone from pariah to partner.

Rise of the raider
The term ‘corporate raid’ describes the process whereby an investor, or raider, chooses to purchase a massive stake in a publically listed company and then uses the voting rights gained from that transaction to undermine the power and practices of the company’s management. Once in control, raiders will attempt to disrupt the make up of the board, replacing specific individuals with members who are willing to take action that will ensure shareholder value is maximised at any cost.

This tactic is not always a success, however, as any board member appointment requires a significant level of support to be obtained from shareholders. It is for this reason that corporate raiders will often employ various strategies designed to persuade shareholders that the current management’s plan for the company is the wrong one and that the direction they wish to take the company in is superior, leading to greater profits and an increased return for the investor.

One of the most infamous corporate raiders has to be Carl Icahn. He has done it all, and then done it again and again. He started out in finance in the belly of the beast – a stockbroker on Wall Street. After spending several years making markets for traders he decided to take them on at their own game, forming Icahn & Co, a securities firm that specialised in risk arbitrage and options trading. Through the success of this firm he was able to build up enough capital to buy up shares in various corporations to give him complete control over their destiny.

His hostile takeover of the now-defunct American airline company Trans World Airlines in the mid-1980s led to him having the corporate raider accolade bestowed on him. In order to assume a majority share of the airline, Icahn took on a substantial amount of debt. To pay back his debtors, he gutted Trans World Airlines, stripping it of its most valuable assets; including its London routes network. When the dust finally settled, Icahn walked away from the company with more than $450m in his back pocket, while the airline, lacking the necessary assets and route networks to adequately compete with its competitors, slowly fell by the wayside, struggling to repay its debt.

Another pioneer of the corporate raid was Thomas Boone Pikens, Jnr. He gained a name for himself as a plunderer and greenmailer of various oil and gas companies throughout the 1980s. As he saw it, the management at these companies were not up to the task and were not acting in the interest of their shareholders, so were in need of a shake up – something he was more than happy to provide.

His Gulf Oil takeover bid was responsible for catapulting Pickens to the cover of Time and is arguably his most famous raid. As the oil company entered the 1980s it was clear that it lacked direction. Its asset portfolio, while large, was not performing adequately – a characteristic reflected in the company’s share price.

However, Gulf Oil caught the attention of the Texas oilman not for its underperformance in the market but because its management had outbid him for the Oklahoma-based oil and gas company, Citigo Petroleum Corporation (Citigo) in 1982.

Pickens owned Mesa Petroleum, and his investors had hoped to buy out Citigo, a company whose share price had been underperforming for some time. But over the course of its battle with Gulf Oil it became clear to Pickens that he could turn a profit by turning his attention to his rival.

Pickens and his money-hungry team of investors at Mesa Petroleum would leave a lasting mark on the oil industry, forcing the sector to take notice of its shareholders and netting millions for them in the process. His actions also drove the management of these oil companies to develop counter measures in a desperate attempt to thwart his incessant attacks.

Backed into a corner
The fact that corporate raiders’ interests and plans deviate so dramatically from those of the board they wish to undermine naturally breeds a high level of contempt between the two parties. The disdain that derives from these polarised positions no doubt led to the name ‘corporate raiders’, as those from within attempt to erect walls capable of withstanding the onslaught of these investment invaders. On the surface, it might appear that there is little management can do to protect themselves, but over the years corporations have developed various tactics to repel such hostile attacks.

Back in 2012, the subscription video-steaming site Netflix was forced to take drastic action after Icahn announced he had bought a 10 percent stake in the company, laying foundations for a hostile takeover and leaving board members fearing for their jobs. In response, Netflix’s management threatened to take a “poison pill” in an attempt to dissuade the infamous raider from doubling down on his investment. Had Icahn pressed on and acquired a 20 percent stake in the company, the defensive manoeuvre would kick in, diluting Netflix’s shares, making any takeover prohibitively expensive.

In the end, the poison pill plan was terminated, with Icahn opting to trade the stock over a three-year period without exceeding the threshold set by the board. It was a clever decision, not only for the fact that he was able net himself over a $1.6bn return on his investment, but because he used his equity stake to apply pressure on a board that held too much power over its shareholders. Proof corporate raiders are sometimes the best defence against despondent and misguided management.

The anti-villain
In the 1980s, Icahn and his contemporaries were vilified for their aggressive tactics because they were undertaken at the expense of smaller shareholders. Over the years, however, their image as malevolent marauders slowly dissipated and their title changed to reflect this evolution from investment pariah to shareholder partner.

Nowadays, corporate raiders – or activist investors as they are now known – are viewed by many as the saviour of minority shareholders who are forced to contend with self-serving executives either incapable or unwilling to take action to provide an adequate return for investors.

“Shareholders should be tickled to death when he shows up”, Pickens told the Financial Times. “He’s about as smooth as a stucco bathtub, he doesn’t pull any punches, but he is accurate about the analysis. You can judge a trapper by his pelts, and Carl’s got a lot of pelts.”

The New York Times can call off its search party. In fact, there has been a resurgence in activist investor activity over the last 10 years or so. The global financial crisis acted as the catalyst, with management at many corporations becoming overly cautious in wake of the downturn and in desperate need of some prodding.

The rebirth of the corporate raider has reignited the debate over whether or not investor activism is a net good or evil. Some argue they are a necessary check-and-balance, while others fear the boardroom battles overshadow everything else, causing too much chaos, so when the dust finally settles all shareholders are left with is a stock drop.

But no matter on which side of the fence people find themselves, corporate raiders have left and will continue to leave a lasting mark on corporate America.