Asset stripping is the practice of taking over a company, whose collective net worth is lower than the value of its individual assets (such as its equipment and property), and then selling off the acquired firm’s assets separately. The predatory company (the buyer) is known as a corporate raider.
Asset stripping is similar to buying a car and then selling off its parts separately. Corporate raiders are the metal scrap dealers of the mergers and acquisition world.
The corporate raider sells off the assets of the firm it acquired to repay its debts, which may have risen in order to finance the takeover.
Asset stripping is a strategy used by some businesses to repay their debts, while at the same time increasing their net worth.
Asset stripping is like buying a large log, chopping it into small pieces, and selling them off as firewood.
The term ‘asset stripping’ is used in a derogatory sense because it is not seen as productive to GDP (gross domestic product).
Asset stripping is a serious problem in emerging economies that are making a transition to the market, like China or Russia, where managers of state-owned businesses sell the assets they control, leaving behind piles of debts for the state to deal with.
Example of asset stripping
Imagine a company called John Doe Inc. 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 stripping often part of fraudulent activity
The Serious Fraud Office, an independent British Government department that investigates and prosecutes serious or complex fraud and corruption, defines asset stripping as taking a firm’s funds or assets of value but leaving behind the debts.
Directors of a company transfer just the valuable assets of one company to another, and leave the liabilities behind.
They effectively leave behind a dormant company that has to be put into liquidation because of its huge debts that cannot be met.
According to the Serious Fraud Office, company assets are stripped for two main reasons:
“1. The fraudsters deliberately target a company or companies to take ownership, move the assets and then put the stripped entity into liquidation. 2. ‘Phoenixing’ – directors move assets from one limited company to another to ‘secure’ the benefits of their business and avoid the liabilities. Most or all the directors will usually be the same in both companies. This usually arises as a way of ‘rescuing’ the assets of a failing business rather than targeting a company.”
“The practice of taking over a company in financial difficulties and selling each of its assets separately at a profit without regard for the company’s future.”
Video – AstraZeneca asset strip?
In this BBC News footage, British lawmakers were concerned about US pharmaceutical giant Pfizer’s intentions when it made moves to try to acquire UK giant AstraZeneca. There was concern that Pfizer’s plan was to asset strip AstraZeneca, resulting in the loss of many British jobs. In the end, Pfizer attempt was unsuccessful.