Shareholder activism originated in the 1980s. One form, associated with the so-called corporate raider, involved engaging in a hostile takeover (acquiring control of a company in the face of strong management resistance), often by encouraging other shareholders to join forces. If successful, the company would be broken up, sometimes even liquidated, because the total value of the corporation’s individual components exceeded the current market value of the entity as a whole. The process was illustrated in the 1991 movie Other Peoples’ Money. Another form was going private, in which the hostile takeover was accomplished by offering the current shareholders a price far above current market value (a tender offer, discussed in Part Three of this chapter). The acquisition was funded by junk bonds collateralized only with the acquired stock (less pejoratively called a leveraged buyout). The bonds were characterized as “junk” because they were enormously risky, a result of the fact that the debt represented the vast majority of the corporation’s value (debt-to-equity ratios of up to 80 percent were observed).

Question 

Do activist investors play a positive role in the capital markets? Explain.