Asset stripping definition
/What is Asset Stripping?
Asset stripping involves the acquisition of a business in order to sell off its assets for a profit. This situation usually arises when the acquirer believes that some acquired assets can be sold off at an enhanced price. By doing so, the acquirer can recover its invested funds and turn a profit. Asset stripping is more likely to occur when the stock price of a business has fallen below the book value of its tangible assets. Such a stock price decline is more likely to occur when a business has repeatedly reported poor results and investors have little confidence in management.
Asset Stripping to Avoid a Hostile Takeover
A company may inflict asset stripping on itself when it is attempting to avoid a hostile takeover. By selling off its "crown jewel" assets, managers hope to make the remaining entity look less interesting to any potential acquirers. Of course, taking this step also degrades the financial performance of the business.
Asset Stripping to Improve Financial Stability
Asset stripping can be more beneficial when it is conducted specifically to improve the financial stability of a firm. For example, a company could be carrying too much debt, so management decides to sell off a subsidiary in order to generate sufficient cash to pay down a large part of the outstanding debt. The associated risk is that the firm might be selling off a subsidiary with excellent growth prospects or intellectual capital, since these are the entities for which buyers are willing to spend the most money.
Disadvantages of Asset Stripping
A likely result of asset stripping is the loss of jobs, especially when the sale of assets involves moving subsidiaries to new locations. This can have a devastating impact on local communities, especially when there are few other employers in the area.
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Example of Asset Stripping
A business is comprised of three subsidiaries, which produce sports equipment, golf carts, and backhoes, respectively. Each of these businesses is worth $40 million, while the entity as a whole is valued at $100 million. An acquirer could buy the firm for $100 million and then sell off each of the subsidiaries for $40 million each, resulting in a $20 million profit.