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Wednesday, January 31, 2007

Corporate Raider or White Knight...?

I am often tempted to ask this question when some aggressive investor ( *corporate raider* for some ) gets tired of a mediocre CEO and his puppet Board, loses his cool and demonstrates another way of running the business.

What’s wrong with that…? Bad managements have no right to run companies.. Even as they systematically destroy shareholder wealth quarter after quarter, they enrich themselves by fat compensation and attractive stock options. Not content with that, at appropriate low price points, they shamelessly backdate them too.

If you were a small shareholder, you would feel powerless. There’s not much that you can do except to post a stinker at some message board or vent your ire by simply selling your shares and exiting the company. The underperforming CEO would come up with some poison pill to ward off the raider which can be even more damaging to you. The CEO does it because he can go back to sleep after the company swallows the pill and he still managing to salvage his pay and stock options. If there’s someone who could queer the moron’s pitch, it is that `bully’ ( sounds much better than `raider’ ) and his cronies who can pull these sleepy Boards out of their torpor.

The flipside is that such moves from bullies need not always be well intentioned. When allowed in, he can strip the company of its assets and walk away with his kill as fast as he stormed in. That is, if the sum-of-parts valuation would yield him more than the whole. But note that it’s a *bad intention* only from a mediocre CEO’s / employee’s perspective, not at all to another common shareholder to whom it could as well present a tremendous exit opportunity. The stock price would shoot up in anticipation of an imminent bidding war between the bully and other counter bidders ( Closer home in India, we can recall the price spirals witnessed by ACC when big bull Harshad Mehta zoomed in on it, L&T when Reliance cornered a sizeable chunk - all these stocks were dogs up until then – that’s what bullies get attracted by ! ) - what more can the common shareholder ask for ?

Indeed they are White Knights for the hapless small shareholder at least.

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