Where Are the Corporate Raiders?
October 31, 2001
After a dry spell, merger and acquisition activity surged in the late 1990s, surpassing the corporate takeover frenzy of the 80s. However, the number of leveraged buyouts (LBO) fell and hostile takeovers plummeted from a high of 40 percent of acquisitions in the mid-80s to roughly 10 percent today.
LBOs -- in which corporate raiders borrowed against the value of a company's stock to finance its takeover -- debuted in the 1980s because of changing capital markets. Prior to 1980, management was loyal to the corporation rather than the shareholders. But as the size of pension and other financial assets under institutional management increased from under 30 percent in 1980 to over 50 percent in 1996, fund managers began demanding a focus on maximizing shareholder value. Firms that failed to respond were targets of corporate raiders.
The changes due to LBOs are substantial. While many LBOs failed during the 80s, they generally improved operating performance of companies. They did this primarily by raising managers' ownership in their companies from 1.4 percent pre-LBO to 6.4 percent post LBO.
Corporate structuring changed as well:
- Stock option plans became an important part of executive compensation and grew seven-fold between 1980 and the mid 1990s.
- This aligned the interests of shareholders and managers closer together; now managers advocate shareholder value in the same way that corporate raiders of old did.
- Boards have become smaller and more effective due to incentive-based compensation, which grew from 25 percent in 1992 to 39 percent in 1995.
This corporate restructuring has led to the decline in corporate raiding, say experts. Essentially, the goal of corporate raiders, improving shareholder value, is now the goal of management.
Source: "The Evolution of Corporate Governance," Economic Intuition, Spring 2001; based on Bengt Holmstrom and Steven N. Kaplan, "Corporate Governance and Merger Activity in the U.S.: Making Sense of the 80s and 90s," Working Paper No. w8220, April 2001, National Bureau of Economic Research.
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