What is a Raider?
In the finance world, raider is short for corporate raider, which is a person or entity that purchases a company for the sole purpose of selling off its assets.
How Does a Raider Work?
Raiders are attracted to companies whose assets have book values that are higher than their market capitalizations. For example, let's say Company XYZ is a shoe company that owns several factories on prime pieces of real estate, has several patents in shoe technology, and owns a variety of other assets, all worth about $250 million today. However, Company XYZ's 'New Feet' line has been a bust and the stock is only worth $1 a share, making the company worth, say, $100 million today. Accordingly, a raider might see that he or she can purchase the company for $100 million and the put the assets up for sale, making a cool $150,000,000 profit.
Why Does a Raider Matter?
Corporations that operate for a profit are legally obligated to act in the best interests of their owners -- the shareholders. What constitutes 'the best interests of the shareholders' is a matter of debate, but when raiders become involved with a company, the company's managers must be more prepared to defend the decisions they make regarding how they have spent shareholder money. Many investors value raiders' ability to get an undervalued companies 'back on track,' as well as the fact that when they make money doing so, the rest of the shareholders benefit too.
One of the most famous raider stories involves the $25 billion takeover of RJR Nabisco by private equity firm Kohlberg Kravis Roberts in 1989. The deal was so famous (and so brazen) that it was immortalized by the book and movie Barbarians at the Gate. In those days, many companies used leveraged buyouts to purchase undervalued companies (that is, they would borrow all or most of the purchase price) only to turn around and sell off the assets.
Carl Icahn was a corporate 'raider' in the 1980s and made millions buying and selling companies. Later, he became more known as an activist shareholder -- a person who buys a substantial portion of a company's shares and then pressures management to take actions that are sometimes uncomfortable but ultimately in the best interest of the shareholders.