Asset stripping
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Asset stripping is a method in which a company or an individual, known as a corporate raider, attains control of another company, and then auctions off the acquired company's assets. The sold assets are often used to repay the debt of the corporate raider, which may have been increased due to the acquisition.[1] The process of asset stripping is utilised by corporate raiders in order to repay the debts they may have, whilst increasing their net worth. A company that may become susceptible to asset stripping is a company whose individual assets are worth more than its collective net worth.
The term is generally used in a pejorative sense as such activity is not considered productive to the economy. Asset stripping is considered to be a problem in economies such as Russia or China that are making a transition to the market. In these situations, managers of a state-owned company have been known to sell the assets which they control, leaving behind nothing but debts to the state.
Contents
History
The innovators of asset stripping were Carl Icahn, Victor Posner, and Nelson Peltz;[2] all of whom were investors in the 70’s and 80’s. Carl Icahn performed one of the most notorious and hostile takeovers when he acquired Trans World Airlines in 1985. Here Icahn stripped TWA of its assets, selling them individually to repay the debt assimilated during the takeover. This particular corporate raid formed the idea of selling a company’s assets in order to repay debt, and eventually increase the raider’s net worth.
One of the biggest corporate raids that failed to materialize was the takeover of Gulf Oil by T. Boone Pickens. In 1984, Pickens attempted to acquire Gulf Oil and sell its assets individually in order to gain net worth. However, the purchase would have had been severely detrimental to Chevron; a customer of Gulf Oil. Therefore, Chevron stepped in and merged with Gulf Oil for $13.2 billion, which at that time was the biggest merger between two companies in history.[3]
In 2011, BC Partners acquired Phones 4u for a fee in the region of £700 million. At this point in time Phones 4u had already entered administration and had deep financial struggles. However, this did not prevent BC Partners from taking a £223 million dividend in order to pay off some of its own debts.[4] Under the ownership of BC Partners, Phones 4u had very little financial freedom to expand and claim back the contract of EE. In September 2014 O2, Vodafone and Three decided to withdraw the rights for Phones 4u to sell their products. Due to the already poor financial situation of Phones 4u, the company has now no alternative but to sell its individual assets and close down. The net worth of Phones 4u’s assets are estimated to exceed £1.4 billion, which provides BC Partners with the credit to pay off some of its debts and significantly improve its net worth.[5]
Controversy
Asset stripping has presented itself to be a highly controversial topic within the financial world. The positives of asset stripping generally lie with the corporate raiders, who can slash the debts they may have whilst improving their net worth.[6] However, the process of asset stripping can in some cases benefit the economy by taking the resources of an inefficient firm, and utilising them for greater efficiency within the economy. However, the general perspective of asset stripping is firmly negative. With most cases of asset stripping resulting in thousands of employees losing their jobs without much consideration of the consequences to the affected community. One particular example of where asset stripping cost a significant number of workers their jobs was in the Fontainebleau Las Vegas LLC case.[7] After the takeover, 433 people lost their jobs when assets were sold off and the company was stripped.
In the United Kingdom
The process of asset stripping is not an illegal practice. If a corporate raider sells the target companies assets individually, pays off its debts then FSA or any legal body have no room for investigation. However, some firms perform the process illegally and if found guilty will incur a hefty fine or even jail time.[8]
Asset stripping by private equity firms in Europe is now regulated pursuant to the Alternative Investment Fund Managers Directive.
Phoenixing
This is one of the two methods in which a corporate raider can perform the act of asset stripping illegally. For this method to work the corporate raider and the targeted firm need to have the same director; the assets of the targeted firm will be transferred to the corporate raider to ensure the assets remain safe from debt collectors.[9] This process allows the corporate raider to improve upon their net worth, whilst leaving any liabilities with the targeted company.
Liquidation
This method acts on completely fraudulent terms, and results in a higher punishment from the FSA. Here corporate raiders take ownership of a company on hostile terms, transfer assets over to their name and then put the dilapidated firm into liquidation. This ensures that the corporate raider improves their net worth, and has no liability to deal with the firm recently placed into liquidation. In comparison to phoenixing, this method has the highest rate of jail sentences issued for those that are found guilty.
References
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