1. © 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

2. 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

3. 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

4. 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

5. 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

6. © 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

7. 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

8. 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