Shmegeggie Foot Massagers has been around forever. Great grandpappy Elmo (Spanish for “The Mo”) sold them to the US army after long marches through the Ardennes in the first war to end all wars. The soldiers then bought them when they got home, and consumers followed suit. The company was so successful that it didn't need to be all that efficiently run.
It went public in 1965, and was a good stock for a while. Then, in the early 1990s, the company didn’t adopt to the new world of internet distribution and robot manufacture, so the stock languished. It remained the same price in 1995 that it was some two-plus decades later. During that same period, the overall stock market went up almost 500 percent, and Shmegeggie’s primary competitor, Pied a Terrible, went up 800 percent, stealing loads of market share from Shmeg.
Since this company was public and largely now owned by the public, the public had the right to have a say in how the company was managed. Endless angry letters were sent to the CEO, Elmo IV, Jr., direct descendent of Pappy Elmo the founder. Those letters were ignored. More letters followed to the board. Ignored. Then finally, a set of activist investors decided that it was time to step in...ironically, on comfortably massaged feet, courtesy of Shmegeggie.
The activist investors simply coalesced all of the common stock shares that they could find, and when the next board election came, where 3 of 11 director seats were to be voted on, the activist investors elected their own slate, or group of directors, who would begin to force the company to behave more like a shareholder-friendly, profit-seeking one, instead of a make-work project for the progeny of Pappy Elmo to simply take a salary and make tens of thousands of sore feet relatively happy.
In fact, the activism here was pretty common in situations like this...fat companies who didn’t streamline and adapt. And there is a whole cadre of lawyers who do little other than chase companies earning 20 cents a share when they should be earning a dollar. Activist investing has become so common that it is almost an industry or investment strategy unto itself now. And that’s a good thing, because some of those fat companies could stand to lose a pound or two.
Related or Semi-related Video
Finance: What is a Corporate Raider?37 Views
Finance, a la shmoop. What is a corporate raider? Well here's an Oakland Raider and [Oakland Raider football player]
here's a corporate raider and yeah eerily similar in that pirate vibe huh [Old guy wearing a suit with a hook for a hand]
Why? Well a corporate raider is more or less what Gordon Gekko did if you saw [Michael Douglas smoking a cigar]
the original Wall Street and other than while the insider information he gleaned [Folder of insider information]
courtesy of Denise Richards X while corporate raiding is actually legal so [Love, Charlie Sheen is written on the folder]
what happens in a corporate raid? Well the raider becomes a dissident
shareholder buying enough of a stake in the company to vote herself or her [Woman walking up to board table]
representatives seats on the board of directors.
Remember common shareholders elect the board the board hires the CEO and fires
the CEO and you know it helps to set a lot of policy sort of like my aunt at the [Red cross appears over the CEO]
dentist, yeah. So what's raiding well a company might have a fully funded [Aunt holding a chainsaw to the dentist]
pension fund, responsible financials which now the company will be quote [100 dollar bills falling]
punished for unquote. Well that pension can serve as collateral for the company
to borrow against to do stuff like buyback its own stock maybe you know or [Company handing over cash for the stock]
buy a competitor, or pay a big fat dividend whether it really needs to or [Shareholders protesting for a dividend]
not. Well in this case the company is raiding their pension fund to pay for
all this junk, like you know when you bust into your savings to buy Beyonce [Piggy bank being smashed]
tickets. Well raiding can also mean that the new
board either with this regretful help of the old CEO or with the help of a newly [New CEO kicks the old CEO away]
recruited CEO sells off parts of itself short-term profits and the stock pops and [Green arrow appears]
then the company dies yeah that's the fear anyway. Well many conglomerates have [Skull and crossbones appears]
dozens of divisions like think GE each of which do business with you know one
another over time but at any given moment in time one division might be in
favor and it would sell for a high multiple at auction among competitors. [Wind turbines spinning]
So maybe the raider puts that division on eBay and gets a bunch of cash for it [An investment division listed on ebay]
and yes then it pays taxes on it too but we'll get to that later. There are [Taxed sign appears]
usually many things that companies can do in this vein of short-term greed
which according to Gordon is good, to goose their [Michael Douglas sat in a pool of money]
stock price and yes that only happens in the short term
only to find that the next business cycle well they're willfully unprepared [Business slides into a dip in output level]
to fight the fight and they end up just kind of anemic and yeah that's the [Money disappears from a vault]
problem by the time that next cycle comes around
and the tide goes out, well the raider pirates have sold their shares and have [Raider getting cash from the market they have sold their shares to]
gone on to go attack some other company having you know just kind of moved on [Company explodes and disappears]
they watched it rise and then they sold and that's it they don't have to stick
around and run the company, sell their shares they're never heard from again [Ship sailing into the sunset]
take their profits and do damage elsewhere. Yeah so it's painful but in
practice corporate raiding generally only happens to companies who have
stumbled and can't really defend themselves you're not gonna get a whole
lot of corporate raiding at Amazon or Google or Facebook because the companies are [Google campus]
doing really well and anyone who came in to try to buy their stock and be hostile
with the board would be shown the door there real quick yeah but in the case of [Woman tries to force her way into the board and is kicked out]
companies like GE and well you saw what happened at Sears and Toys R Us and soon
Target and a few others were all stumbling yeah well then they get raided, the company [Companies sinking into the ocean]
slowly drowns and it's now raided and or weak in condition and yeah dinner coming [Shark eats Sears logo]
there for you there Sharky..
Up Next
What is Activist Investing? Activist investing is done with the goal of actually implementing change at a company by buying so many of its shares....
What are Active Investing and Active Management? Active investing means exactly what it sounds like. The investor is actively buying and selling, a...
A Pac-Man defense is a strategy for defending against a hostile takeover. Or...against unwelcome houseghosts.
Shark repellent is a takeover defense technique used by companies attempting to fend off corporate raiders. Huh. That's way duller than we were exp...