What Is Asset Stripping?

A much more aggressive form of value investing is called asset stripping.

Generally, the value investor is a long-term participant who has spotted underpriced assets. This investor may need to wait some time before the market agrees and prices the company at a highr level.

However, there are bigger players in this game too. They are management teams of hedge funds, vulture funds, special situations funds and more. These managers will purchase large blocks of company stock and then use the influence that buys to pressure company management.

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The pressure that they apply will be aimed at changing the direction or strategy being taken by the firm. This will often involve hard decisions that usually lead to parts of the company being sold. By selling some parts of a business, corporate debts can be lowered or loss making subsidiaries jettisoned to leave a healthier and more profitable firm. This will help the market price rise and investors will hopefully make a more acceptable return on their investment.

At the top end of the scale come the really big boys. They are comprised of private equity firms, deal makers, hedge funds and other rival corporations. It is generally their aim to borrow large amounts of money, win control of a target company in a hostile takeover and then sweat the assets to produce a return. The assets may be managed differently, sold or restructured.

Many of these deals occur every year. Often they will result in sales of some or all parts of a company. This is the art of the asset stripper and it is one that is hugely profitable.

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Asset stripping can often involve selling every part of a purchased corporation to a different organisation. If the sales create more cash than was paid for that part of the firm, a profit has been made. Whilst each individual part of a firm may only bring in a small percentage gain, the overall value 'unlocked' can amount to tens or hundreds of millions! This money finds its way into the hands of the purchasers - who can become very wealthy, very quickly.

In an ideal world, sales of property of subsidiary companies will generate cash which can be used to repay lenders. As more parts of an operation are sold, more debt will be repaid until the purchaser owns a company with manageable or zero borrowing, or better yet a pile of cash from sales.

If the idea of asset stripping seems a little odd or confusing, a great way to learn about it is to watch either or both of the following films:

Wall Street featuring Michael Douglas and Charlie Sheen, or

OPM (stands for Other People's Money) featuring Danny DeVito.

Both films look at the impact of asset stripping by major players on the corporations and employees impacted whilst also being entertained by the big-shot Wall Street types making the deals.

If you would like to read more about value investment, please visit the following pages:

Value Investing

Value Investing Basics

Value Investing Approach

The Value Investing Rules Of Ben Graham

Value Investing Strategy

Value Investing With Warren Buffett

Value Versus Growth Investing

Value Investing Latest News

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