It may not be very common but sometimes the people running the company just aren’t doing a good job.

The issue is that by protecting companies from raiders the ability of shareholders to regulate the behavior of management is REDUCED.

In some sense raiders are providing a service to solve the collective action problem. The costs to coordination necessary to extract the value in the company which the managers are wasting (possibly to their own benefit) is too high for them to do the extraction themselves but they end up with more money by letting a raider come in and centralize ownership and achieve just that.

Corporations tend to have inertia and even when a particular line of work becomes a money losing proposition if they don’t have any better markets to move into they can continue to function while burning up money and using resources that could be better put to other uses (hence why they are losing money).

For instance businesses where the family of the founder still has significant influence, e.g., the ceo is the grandson, or the executives have strong allegience to the company may be reluctant to face the facts that the enterprise is no longer worth continuing.

In situations like this it can be profitable to take over the company and simply sell off the resources since the continued operation of the firm is a liability not an asset. However, this is still a beneficial service even if it may be very painful for the employees (the jobs will be lost eventually better to do so before they waste more resources).

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The only theory upon which it seems reasonable to be concerned about corporate raiders is one in which the market is deeply irrational and assigns unreasonably high values to the pieces of the company, e.g., like when during the tech boom such an irrational exuberance attached to internet companies that their stock would be boosted hugely but that same glow wasn’t always transferred to the valuations of the parent companies. However, I take this to be rare and as suggested when this is happening it doesn’t really matter if their are raiders or not things are going to go to pot.

Greenmail is another category – management paying off a “raider” with stockholder assets to protect their own position.

The capital raised through this borrowing goes to paying off the former shareholders, not towards building the business. So now the firm has this additional debt load with no growth spending to help service it.

Well, this scenario raises the obvious question of why the corporate raider would borrow money in order to pay off the former shareholders. Even assuming that the corporate raider has nicely protected themself via limited liability against all recourse in the event of the loans being repaid, raising the loans and paying for legal advice requires time that could be spent doing something else. So, unless we believe that corporate raiders are altruists who have for some reason decided to direct their altruism towards shareholders, presumably the corporate raider is expecting to get a profit from it themselves. Some options:
1).They plan to sell the company in the short-term to someone who can probably manage it better than them or the former shareholders, but prefers not to look for companies directly. In other words, the corporate raider is providing a divsion-of-labour-service. Sounds good to me.
2) They plan to run the company into the ground to extract short-term profits and then sell it to a bigger fool. Possible, but if there is an ample supply of fools out there with money to buy companies then the existing management could just take out massive loans and then sell their own company to the fool directly, so I don’t see any reason for banning corporate raiders specifically.
3) The corporate raider thinks that the firm’s profitability can be improved by better management, even without any extra significant investment spending (we will allow some for changing the names on the front door and so forth). The corporate raider might be wrong about this, but then that’s true of any business venture.

Am I missing something?