What is asset stripping?
Asset stripping is what happens when a company is bought not as a going concern but simply for the profit that can be made on the sale of its assets. These can take the form of land, machinery, property, inventory and securities but also intellectual property such as patents or licences.
Where have you heard about asset stripping?
Accusations of asset stripping are common in the aftermath of a corporate takeover when parts of the operation are sold at a profit. The 'corporate raiders' of the Eighties were often portrayed as asset strippers. Their most famous fictional depiction was Michael Douglas' character Gordon Gekko, in the 1987 film Wall Street.
What you need to know about asset stripping.
Asset strippers seek out undervalued corporate assets that can be sold for a profit. Sometimes they are undervalued because the company’s auditor has not updated its estimate of the assets’ true worth. Sometimes it is because they have been valued on the basis that the company will continue as a going concern, so the assets concerned will not be available for sale.
Imagine a company called John Doe Inc. that has three completely different businesses: shipping, gyms and furniture. John Doe Inc. is currently valued at $150 million, but a corporate raider, called Vultures Ltd, believes it could sell the three businesses for $70 million each. Vultures Ltd. sees an asset stripping opportunity.
Vultures Ltd. then acquires John Doe Inc. for $150 million and sells the three businesses separately, for a total of $210, thus making a profit of $60 million.
Asset strippers sometimes look for companies where the break-up and sell-off value exceeds their worth as going concerns. Sometimes the term is used inaccurately to describe the process whereby assets are made to work harder by a new owner.
Find out more about asset stripping.
Asset stripping requires detailed examination of a target company's financial reports and balance sheet.