© Ram Mudambi, Temple U and U of Reading DISCUSSION QUESTIONS 1. Is the existence of corporate raiders an example of market failure? 2. Should corporate raiders be restrained?  In other words, what are the consequences of temporary restraining orders (TROs), SEC disclosure requirements, etc.? 3. What coordination costs are highlighted here? © Ram Mudambi, Temple U and U of Reading

Firm Organization w/o Raiders Actual Accounting Profits Shareholders Board of Directors  Salary and Benefits MOTT Incumbent Management © Ram Mudambi, Temple U and U of Reading

Role of Corporate Raiders Working of the market for corporate control Locate arbitrage opportunities and use financial market tools (LBOs, MBOs) to exploit them Located arbitrage gains = ‘Money on the table’ (MOTT) Incentives for internal business process re-engineers (e.g., Jack Welch) Dealing with diseconomies of scope Diseconomies of scope – merger waves of the 1960s and early 1970s spawned by intra-firm diversification theory. © Ram Mudambi, Temple U and U of Reading

Arbitrage Gains (MOTT) X-inefficiencies created by Lack of managerial effort Managerial empire-building Typically raiders split the MOTT with share-holders – premium share price © Ram Mudambi, Temple U and U of Reading

Restraints on Raiders TROs, SEC disclosure requirements First-mover advantages to incumbent management – allows search for ‘white knights’ Up-side – increased competition between raider and management  shareholders get a bigger share of the MOTT Increases information in the market Down-side – protects management from raiders  lower amount of MOTT © Ram Mudambi, Temple U and U of Reading

© Ram Mudambi, Temple U and U of Reading Transaction Costs Asymmetric information = the source of most costs analyzed here The coordination costs for shareholders to ascertain the amount of MOTT are high Hence without the raider, management keeps the MOTT Raiders can cause management to erect pre-emptive defenses – poison pills Each shareholder has little to gain, relative to the costs borne The raider can take a big share of the MOTT – hence has an incentive to look for it. © Ram Mudambi, Temple U and U of Reading

Firm Organization w/ Raiders Actual Accounting Profits Shareholders Board of Directors Raider’s Pay-off MOTT Raider © Ram Mudambi, Temple U and U of Reading

THE ESSENCE OF SURVIVAL Every morning in Africa, a zebra wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning, a lion wakes up. It knows it must outrun the slowest zebra or it will starve to death. It doesn’t matter whether you are a lion or zebra......when the sun comes up, you’d better be running. © Ram Mudambi, Temple U and U of Reading