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Remember Corporate Raiders? The very name sounds so 90s, doesn’t it? These swashbucklers of the corporate stock markets believed in a kind of financial engineering that, by the lights of the more modern and esoteric techniques of debt packaging and trading, seem both simple and benign.
It didn’t always seem that way back then. The classic approach was to find an under-performing business with good cash flow and then buy it with expensive ‘junk’ debt, then use the company’s own cash to pay for the debt while radically cutting costs and/or breaking up the business for sale. Also, it often seemed a one-way ticket. The raider bought some shares, the price went up because of who they were, then they backed out and pocketed a profit.
The operation often looked like asset stripping, and often it was. But raiders would argue they could only predate on companies failing to maximise returns to shareholders. Certainly, it could be argued, their lurking presence meant managers became less relaxed about taking a ‘high on the hog’ ride on the back of lazy institutional stockholders.
As well as financial engineering, the other thing raiders brought was a cool logic and a chess player’s eye for unfolding competitive situations and looming, profitable, consolidation.
This brings us to Carl Icahn’s ‘raid’ to purchase 10 per cent of Netflix. His logic is:
The corporate raider’s top talent is not to worry about whether the target is hi-tech, or sexy content, or boring minerals or food crops. They only care what the target company is like now, what is its market like now, what will its market be like in a year or two, and what opportunity does that present? Simples.