Return of the Raider

Prior to the late 1970s, few people had ever heard of “hostile takeovers.” By the late 1980s, they were everywhere—and their practitioners were known as “corporate raiders” or “barbarians at the gate.”

These monikers were well earned. In gaining control, many raiders would load up a corporation with debt, and then, as often as not, sell off the company in pieces.

Peter Drucker observed the trend with dismay. In a 1986 essay, Drucker called hostile takeovers “exceedingly bad for the economy,” maintaining that they forced executives to take costly defensive positions and make bad long-term decisions, such as unloading all of their cash (always attractive to the raider) as quickly as possible, rather than investing it in research or keeping it for a rainy day.

Today, as Rana Foroohar wrote recently in Time magazine, the corporate raider is back. For instance, Carl Icahn, one of the original “barbarians,” lately has been gunning for Apple, pressuring the company to give some of its “$147 billion cash hoard back to investors in the form of a massive share buyback.” That makes Apple relatively lucky, since Icahn says management is generally doing a good job and he does not intend to dismember the company. Others, such as Timken, an Ohio steel and bearings maker, have been broken up.

These days, as Foroohar explained, the raiders call themselves “shareholder activists—a clever rebranding for some of them.”

Image source: Wikimedia
Image source: Wikimedia

The “activists” defend themselves, saying that companies ought not sit on piles of cash. And as was the case 30 years ago, pension funds are not content with the returns associated with today’s sluggish economy.

“Shareholder activists” also state that some of their targets ought to be performing better overall. This was the same rationale used in the 1980s, of course, though Drucker asserted that many of the companies being hunted at that time were “doing well by any yardstick.”

Indeed, critics say that this new “activism” is just old wine in new bottles, and that forcing companies to break up or play defense as they did in the 1980s is unhealthy.

What’s more, while Icahn has done exceedingly well—with his Icahn Enterprises reaping a nearly 24% annualized return over the past 13 years—“a majority of corporate-activist targets since 2009 have had negative returns within a year of the campaign,” Foroohar noted.

What do you think? Does the “shareholder activist” do more harm or good in today’s economy?