In business, a corporate raid is the process of buying a large stake in a corporation and then using shareholder voting rights to require the company to undertake novel measures designed to increase the share value, generally in opposition to the desires and practices of the corporation's current management. The measures might include replacing top executives, downsizing operations, or liquidating the company.
Corporate raids were particularly common between the 1970s and the 1990s in the United States. By the end of the 1980s, management of many large publicly traded corporations had adopted legal countermeasures designed to thwart potential hostile takeovers and corporate raids, including poison pills, golden parachutes, and increases in debt levels on the company's balance sheet. In later years, some corporate raiding practices have been used by "activist shareholders", who purchase equity stakes in a corporation to influence its board of directors and put public pressure on its management.
History of private equity and venture capital |
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Early history |
(origins of modern private equity) |
The 1980s |
(leveraged buyout boom) |
The 1990s |
(leveraged buyout and the venture capital bubble) |
The 2000s |
(dot-com bubble to the credit crunch) |
The 2010s |
(expansion) |
The 2020s |
(COVID-19 recession) |
Corporate raids became a hallmark of investors in the 1970s and 1980s, particularly highlighted by the public suicide of Eli Black. Among the most notable corporate raiders of the 1970s and 1980s were Louis Wolfson, Carl Icahn, Victor Posner, Meshulam Riklis, Nelson Peltz, Robert M. Bass, T. Boone Pickens, Paul Bilzerian, Harold Clark Simmons, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman. These investors used a number of the same tactics and targeted the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms. In fact it is Posner, one of the first "corporate raiders" who is often credited with coining the term "leveraged buyout" or "LBO". [1]
Victor Posner, who had made a fortune in real estate investments in the 1930s and 1940s, acquired a major stake in DWG Corporation in 1966. Having gained control of the company, he used it as an investment vehicle that could execute takeovers of other companies. Posner and DWG are perhaps best known for the hostile takeover of Sharon Steel Corporation in 1969, one of the earliest such takeovers in the United States. Posner's investments were typically motivated by attractive valuations, balance sheets and cash flow characteristics. Because of its high debt load, Posner's DWG generated attractive but highly volatile returns and ultimately landed in financial difficulty. In 1987, Sharon Steel entered Chapter 11 bankruptcy protection. [2]
Carl Icahn developed a reputation as a ruthless "corporate raider" after his hostile takeover of TWA in 1985. [3] The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used to purchase the company, which was described as "asset stripping". [4]
Icahn also attempted the grand prize of U.S. Steel, launching a hostile takeover for 89% of the industrial giant for $7 billion ($17.3 billion today) in late 1986 and only being rebuffed finally by CEO David Roderick on January 8, 1987. [5]
T. Boone Pickens' hostile takeover bid of Gulf Oil in 1984 led to shock that such a large company could be raided. Gulf eventually sold out to Chevron for a then-record $13.3 billion ($34.7 billion today) "white knight" buyout.
Paul Bilzerian launched a number of takeover bids including Cluett Peabody & Company, Hammermill Paper Company, Pay n Pack Stores, Allied Stores and the Singer Corporation. All of his takeover bids were for all cash and for all shares and he refused any greenmail. Bilzerian was indicted for Schedule 13(d) disclosure violations and despite his claims of innocence he was convicted in 1989. After spending thirty years fighting the government in his attempt to overturn his conviction, he renounced his US citizenship in 2019.
British raider Beazer also launched several successful hostile takeovers in the 1980s, the largest being that of Koppers in early 1988 for $1.81 billion ($4.3 billion today). [6]
Many of the corporate raiders of the 1980s were onetime clients of Michael Milken, whose investment banking firm, Drexel Burnham Lambert helped raise blind pools of capital which corporate raiders could use to make legitimate attempts to take over companies and provide high-yield debt financing of the buyouts.
Drexel Burnham raised a $100 million blind pool in 1984 for Nelson Peltz and his holding company Triangle Industries (later Triarc) to give credibility for takeovers, representing the first major blind pool raised for this purpose. Two years later, in 1986, Wickes Companies, a holding company run by Sanford Sigoloff, would raise a $1.2 billion blind pool. [7] In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as the firm and the private equity industry attempted to move upscale.
In 1985, Milken raised $750 million for a similar blind pool for Ronald Perelman, which would ultimately prove instrumental in acquiring his biggest target: The Revlon Corporation. In 1980, Ronald Perelman, the son of a wealthy Philadelphia businessman, and future "corporate raider", having made several small but successful buyouts, acquired MacAndrews & Forbes, a distributor of licorice extract and chocolate, which Perelman's father had tried and failed to acquire 10 years earlier. [8] Perelman would ultimately divest the company's core business and use MacAndrews & Forbes as a holding company investment vehicle for subsequent leveraged buyouts including Technicolor, Inc., Pantry Pride and Revlon. Using the Pantry Pride subsidiary of his holding company, MacAndrews & Forbes Holdings, Perelman's overtures were rebuffed. Repeatedly rejected by the company's board and management, Perelman continued to press forward with a hostile takeover, raising his offer from an initial bid of $47.50 per share until it reached $53.00 per share. After Revlon received a higher offer from a white knight, private equity firm Forstmann Little & Company, Perelman's Pantry Pride finally was able to make a successful bid for Revlon, valuing the company at $2.7 billion. [9] The buyout would prove troubling, burdened by a heavy debt load. [10] [11] [12] Under Perelman's control, Revlon sold 4 divisions: two were sold for $1 billion, its vision care division was sold for $574 million, and its National Health Laboratories division was spun out to the public market in 1988. Revlon also made acquisitions including Max Factor in 1987 and Betrix in 1989, later selling them to Procter & Gamble in 1991. [13] Perelman exited the bulk of his holdings in Revlon through an IPO in 1996 and subsequent sales of stock. As of December 31, 2007, Perelman still retains a minority ownership interest in Revlon. The Revlon takeover, because of its well-known brand, was profiled widely by the media and brought new attention to the emerging boom in leveraged buyout activity. Litigation associated with the takeover has also become standard reading for introductory business organization classes in most law schools, introducing what have come to be known as "Revlon duties" for boards of companies that are up for auction.
In the late 1980s several famous corporate raiders suffered from bad investments financed by large amounts of leverage, ultimately losing money for their investors. Additionally, with the fall of Michael Milken and the subsequent collapse of Drexel Burnham Lambert, the credit lines for these investors dried up. By the end of the decade, management of many large publicly traded corporations reacted negatively to the threat of potential hostile takeover or corporate raid and pursued drastic defensive measures including poison pills, golden parachutes and increasing debt levels on the company's balance sheet. 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. By the end of the 1990s, the corporate raider moniker was used less frequently as private equity firms pursued different tactics than their predecessors. In later years, many of the corporate raiders would be re-characterized as "activist shareholders", such as Carl Icahn during his 2008 profile on CBS's 60 Minutes . [14]
Although private equity rarely received a thorough treatment in popular culture, several films did feature stereotypical "corporate raiders" prominently. Among the most notable examples of private equity featured in motion pictures included:
In business, a takeover is the purchase of one company by another. In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The use of debt, which normally has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower because interest payments often reduce corporate income tax liability, whereas dividend payments normally do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity.
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a type of ownership of assets and is a class of assets, which function as modes of financial management for operating private companies that are not publicly traded in a stock exchange.
Carl Celian Icahn is an American financier. He is the founder and controlling shareholder of Icahn Enterprises, a public company and diversified conglomerate holding company based in Sunny Isles Beach. Icahn takes large stakes in companies that he believes will appreciate via changes to corporate policy and he then pressures management to make changes that he believes will benefit shareholders. He was one of the first activist shareholders and is credited with making that investment strategy mainstream for hedge funds.
Asset stripping is a term used to refer to the practice of selling off a company's assets in order to improve returns for equity investors. In many cases where the term is used, a financial investor, referred to as a "corporate raider", takes control of another company and then auctions off the acquired company's assets. The term is generally used in a pejorative sense as such activity is not considered helpful to the company.
Revlon, Inc. is an American multinational company dealing in cosmetics, skin care, fragrance, and personal care. The headquarters of Revlon was established in New York City on March 1, 1932, where it still remains. Revlon was founded by brothers Charles and Joseph Revson, and chemist Charles Lachman. Revlon products are sold in 150 countries and the company has many global locations including Mexico City, London, Paris, Hong Kong, Indonesia, Sydney, Singapore, and Tokyo.
Greenmail or greenmailing is the action of purchasing enough shares in a firm to challenge a firm's leadership with the threat of a hostile takeover to force the target company to buy the purchased shares back at a premium in order to prevent the potential takeover.
Drexel Burnham Lambert was an American multinational investment bank that was forced into bankruptcy in 1990 due to its involvement in illegal activities in the junk bond market, driven by senior executive Michael Milken. At its height, it was a Bulge Bracket bank, as the fifth-largest investment bank in the United States.
The "highly confident letter" was a financing tool created by investment bankers at Drexel Burnham Lambert, dominated by Michael Milken, in the 1980s. Its objective was to enable corporate raiders to launch leveraged buyout (LBO) offers without the debt component of their financing package fully in place.
Victor Posner was an American businessman. He was one of the highest-paid business executives of his generation. He was a pioneer of the leveraged buyout and became notorious for asset stripping.
Thomas H. Lee is an American businessperson, financier and investor and is credited with being one of the early pioneers in private equity and specifically leveraged buyouts. Thomas H. Lee Partners (THL), the firm he founded in 1974, is among the oldest and largest private equity firms globally. Lee is currently the managing partner of Lee Equity Partners, a private equity firm he founded in 2006 after leaving Thomas H. Lee Partners.
MacAndrews & Forbes Incorporated is an American diversified holding company wholly owned by billionaire investor Ronald Perelman. Current investments include leading participants across a wide range of industries, from cosmetics and entertainment to biotechnology and military equipment. The principal interests of MacAndrews & Forbes include AM General, Harland Clarke, Merisant, RetailMeNot, Revlon, Scantron, Scientific Games Corporation, SIGA Technologies, Valassis and vTv Therapeutics.
The history of private equity and venture capital and the development of these asset classes has occurred through a series of boom-and-bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel, although interrelated tracks.
The early history of private equity relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.
Private equity in the 1980s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.
Private equity in the 1990s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital, experienced growth along parallel although interrelated tracks.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, was a landmark decision of the Delaware Supreme Court on hostile takeovers.
Trimaran Capital Partners is a middle-market private equity firm formerly affiliated with CIBC World Markets. Trimaran is headquartered in New York City and founded by former investment bankers from Drexel Burnham Lambert. Trimaran's predecessors were early investors in telecom and Internet businesses, most notably backing Global Crossing in 1997. Trimaran also led the first leveraged buyout of an integrated electric utility.
The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders, by Wall Street Journal writer Connie Bruck, largely recounts the rise of Michael Milken, his firm Drexel Burnham Lambert, and the leveraged buyout boom they helped to fuel in the 1980s.
Paul Alec Bilzerian is an American businessman and corporate takeover specialist.