What is asset stripping?
Asset stripping is a way to profit from a company that isn’t performing well by selling off what it owns.
Asset stripping involves the widespread sale of company assets to produce dividends for shareholders.
If you’re new to the topic, asset stripping may sound like a last-ditch attempt to save a company. It’s not. It’s simply a way to make money while the company is in a rough spot.
Ultimately, the company itself benefits little, if at all, from asset stripping.
What does asset stripping involve?
Asset stripping occurs when someone buys an undervalued company and begins selling its assets individually.
They see financial potential in this move, believing that if the assets are sold one at a time, their combined value will be higher than what the company is worth as a unit.
Imagine someone who is looking to sell the contents of a house. Collectively, they might have a price tag of $20,000, but if sold individually, they could add up to $25,000 – meaning a profit of $5,000. This is what is happening with asset stripping.
Assets are anything appearing on a company’s balance sheet. They include, but aren’t limited to:
- Brand names
- Unsold products
When sold, the assets will generate dividends for all shareholders.
How does asset stripping make sense?
Because a difference can easily arise between two of a company’s financial figures:
- It’s market value – i.e. the price someone would pay to buy it.
- It’s book value – i.e. how much it’s worth based on what it owns.
If a company’s book value is higher than its market value, it is a prime target for asset stripping.
Why would market value dip so low?
Market value depends on other factors besides the value of assets. The economy influences it, as does the company’s business practices. Companies that are poorly run, and facing a recession which negatively impacts business, could easily see their market value dip below their book value.
Who are the asset strippers?
Also known as company raiders, these could be:
- High net-worth individuals (or a team of several)
- Private equity funds
- Hedge funds
- A larger competitor of the company being stripped.
What happens to the company on the receiving end of an asset strip?
It’s rarely good news for the company.
When asset strippers purchase a firm, they rarely care about longevity – merely how much they can make from sales. In their eyes, the company is undervalued, maybe on its way out for good, and they want to make money during its dying days.
Often, but not always, an asset-stripped company will end up in receivership, as it has no means to continue business.
Is asset stripping a good thing?
Those who do it will say yes, as will the shareholders of undervalued companies. They see it as drawing some good news from a bleak financial situation.
The broader corporate world has fewer positive things to say about it.
Critics often blast asset stripping for the indiscriminate way it treats company employees. They see assets sold around them, sometimes leaving them unable to fulfil their role. In the long term, they know their futures are highly uncertain, but they receive little help from asset strippers focused on selling.