What? Surely you don't believe that disastrously bad CEOs can't exist.

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

Expand full comment

Your missing the point.

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.

Expand full comment

The situation where the business is simply wasting resources.

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).


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.

Expand full comment

In how many of these cases did the shareholders who were bought out lose money?

Greenmail is another category - management paying off a "raider" with stockholder assets to protect their own position.

Expand full comment

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?

Expand full comment

What a remarkable quote from Justice Roberts, clearly introducing ideological considerations into his role as objective interpreter of the Constitution. Unless there is some secret clause in the Constitution that only the Chief Justice gets to know about saying "Congress shall make no law that is extraordinarily paternalistic."

Expand full comment

Thanks Michael Vassar for your answer, and I agree those are easy big wins. (By agricultural reform you mean ending subsidies, right? Are there other good reforms in that area to be aware of?)

Expand full comment

Agricultural reform is close to the top of mine, ending the drug war is probably the very top. That or separating medical care from employment.

Expand full comment

Think about it, if a company could not service its debts and it goes into bankruptcy, the debt holders now own the company. But why would the debt holders shut down a viable business?

Bankruptcy is a game of bilateral monopoly; it gets dragged out into a negative sum games of chicken. What you say is only true in the absence of transaction costs.

Expand full comment

While i agree with Robin that the take over laws are ludicrously favorable to incumbent management, I am not sure that overall economic efficiency suffers by that much. I think management, at least in large companies, are mostly sufficiently incentivised nowadays to minimize their rent seeking at a level sufficiently low enough not to hurt the overall performance of an economy. What keeps the rent seeking at a tolerable level is the very visible share price, which give very clear signals to people to apply Ostram type shame to managers who are obviously plundering or abusing their position.

Expand full comment


On investors (bond holders), the story of Simmons did not work out, but that's investing for you, some do, some don't. I hope you are not suggesting that investing should be risk free? Probably there is a story of gullibility here, which the PE guys took advantage of, but regulations will never eliminate that.

On the employees, the layoffs at Simmons are not due to the take over. They are due to the fact that the business model didn't work. The amount of debt carried by Simmons is irrelevant. Think about it, if a company could not service its debts and it goes into bankruptcy, the debt holders now own the company. But why would the debt holders shut down a viable business? If the underlying business is sound, the debt gets restructured and the employees carry on before. It doesn't make sense for an owner to say, well my employees are cash flow positive, but I am going to lay them off to reduce my cash flow because I have high debts.

Expand full comment

We can discuss the economics of used cars if you like, but just how off topic do you want to go? I think the analogy of used cars to companies is breaking down.

But, to play along, I was referring specifically to the mechanical failures that used cars are more prone to than new ones. So governments require purchasers of used cars to get them inspected and maintain them to a minimum standard of safety. Working brakes, headlights and so on.

You're talking about the generic hazards that come from being responsible for a large amount of kinetic energy. And governments make us buy liability insurance for that.

How about this idea; governments track owner's histories of layoffs and bankruptcies, and raise their portion of FICA premiums accordingly? Just like drivers with lots of accidents pay higher premiums to cover the extra liability?

Expand full comment

If you've seen studies, please cite those.

DBL is a fair sample. Did it really turn out so badly?

Expand full comment

"Numerous studies show that shareholders in firms that are the subject of takeovers enjoy significant profits."


The few long term studies I've seen on raiding activity are mixed to negative.

Anecdotally, I could LITERALLY name hundreds of raids/acquisitions by raiders, investment banks, hedge funds, SIV's etc. that destroyed most to all net shareholder and vast corporate values with resultant losses in the trillions. Staggering debt loads, underfunded pensions, job destruction, inept management and failure are much more common result. My confidence level would be high that, at best, raiding is a near wash with an error of +/-10% Just a couple off the top of the head;

TWARevlonMCI/WorldComSears/KmartVirtually anything done by Drexel Burnham Lambert

Expand full comment

Yes, someone once bought a used car via a loan and then crashed it, so the bank never got its money back, so we should never allow anyone to buy used cars ever again.

Expand full comment