Asset Stripping

What Is Asset Stripping?

Asset stripping is the most common way of buying a undervalued company with the intent of selling off its assets to produce a profit for shareholders. The individual assets of the company, like its equipment, real estate, brands, or intellectual property, might be more valuable than the company as a whole due to such factors as poor management or poor economic conditions.

The consequence of asset stripping is frequently a dividend payment for investors and either a less-viable company or bankruptcy.

Understanding Asset Stripping

Asset stripping is an action frequently participated in by corporate raiders, whose method is to buy undervalued companies and concentrate value out of them. This practice was particularly famous during the 1970s and 1980s and can in any case be found in a portion of the investment activity by private equity firms today.

Private equity firms will obtain a company, sell off its most liquid assets, and raid its cash money vaults to pay dividends to itself and shareholders. Such activity might include taking a company private. The private equity investor will then recapitalize the company with extra debt, which gives the practice its metaphorical name "recapitalization," which is a rebranding of the slandered asset-stripping practice.

Recapitalizations frequently include the utilization of leveraged loans. Such a strategy is required by the way that stripped-out companies might have minimal collateral passed on to issue debt and must rather borrow money, ordinarily at less favorable terms and rates. The leveraged loans are in many cases made by a group of banks that see them as too hazardous to keep on their balance sheets.

Accordingly, the structured products are immediately sold off to mutual funds or exchange traded funds (ETFs). They may likewise be securitized into collateralized loan obligations (CLOs), which are bought by institutional investors.

Analysis of Asset Stripping

Asset stripping debilitates a company, which has less collateral for borrowing and may have its value-delivering assets stripped out, leaving it less able to support the debt it has. Generally, the outcome is a less viable company, both monetarily and in its capability to make value via manufacturing or another enterprise.

While proceeds from asset stripping might be utilized to pay down debt, it is undeniably more normal that proceeds will be used to pay a dividend to shareholders. For instance, retailers that are owned by private equity companies that have taken part in asset stripping and recapitalization are bound to default on their debt.

Investors that take part in asset stripping contend that it is their right to do so and that they are removing value out of companies that are bound to fail.

Illustration of Asset Stripping

Envision that a company has three distinct businesses: shipping, golf clubs, and dress. Assuming the value of the company is at present $100 million yet another company accepts that it can sell every one of its three businesses, their brands, and real estate holdings to different companies for $50 million each, an asset-stripping opportunity exists. The purchasing company, for example, a private equity firm, will then, at that point, buy the company for $100 million and sell every business off separately, possibly making a $50 million profit.

Features

• Asset stripping frequently yields a dividend payment for shareholders while at the same time bringing about a less-viable company.
• Recapitalization alludes to the cycle where asset-stripped companies assume new debt frequently using leveraged loans.
• Asset stripping is the point at which a company or investor buys a company fully intent on selling off its assets to create a gain.