Asset stripping: Difference between revisions
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{{Short description|Selling assets for the sake of equity investors}} |
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{{Overcoverage|region=the UK|datedate=December 2014|date=December 2014}} |
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{{More citations needed|date=August 2023}} |
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{{Globalize|1=article|2=United Kingdom|date=February 2024}} |
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'''Asset stripping''' refers to selling off a company's [[asset]]s to improve returns for equity investors, often a financial investor, a "[[corporate raid]]er", who [[takeover|takes over]] another company and then auctions off the acquired company's assets.<ref>{{cite web|url=http://financial-dictionary.thefreedictionary.com/Asset-stripping|title=Asset Stripping|publisher=HarperCollins|access-date=30 October 2014}}</ref> The term is generally used in a [[pejorative]] sense as such activity is not considered helpful to the company. |
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The proceeds of the sale of assets may be used to lower the company's net debt. Alternatively, they may be used to pay a dividend to equityholders, leaving the company with lower [[net worth]] – i.e. the same level of debt but fewer assets (and weaker earnings) to support that debt. With a lower level of assets, some argue that the business is rendered less financially stable or viable. For example, the [[sale-and-leaseback]] of a building would lead to an increased rental bill for the company. |
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'''Asset stripping''' is a method in which a [[company]] or an individual, known as a [[corporate raid]]er, [[takeover|attains control of]] another company, and then auctions off the acquired company's [[asset]]s. The sold assets are often used to repay the debt of the corporate raider, which may have been increased due to the acquisition.<ref>{{cite web|title=Asset Stripping|url=http://financial-dictionary.thefreedictionary.com/Asset-stripping|website=http://financial-dictionary.thefreedictionary.com|publisher=HarperCollins|accessdate=30 October 2014}}</ref> 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. |
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| ⚫ | Asset stripping is a highly controversial topic within the financial world. The benefits of asset stripping generally go to the corporate raiders, who can slash the debts they may have whilst improving their net worth.<ref>{{cite web|url=http://www.economicshelp.org/blog/glossary/asset-stripping/|title=Asset Stripping|last1=Pettinger|first1=Tejvan|access-date=30 October 2014}}</ref> |
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| ⚫ | However, since asset stripping often results in thousands of employees losing their jobs without much consideration of the consequences to the affected community, the concept can be unpopular in the public sphere. One particular example of where asset stripping cost a significant number of workers their jobs was in the [[Fontainebleau Resort Las Vegas|Fontainebleau Las Vegas LLC]] case.<ref>{{cite web|url=http://www.reviewjournal.com/business/economy/removal-fontainebleau-s-construction-crane-signals-doom-ill-fated-strip-hotel|title=Removal of Fontainebleau's construction crane signals doom for ill-fated Strip hotel|last1=Stutz|first1=Howard|publisher=Stephens Media LLC|access-date=30 October 2014}}</ref> After the takeover, 433 people lost their jobs when assets were sold off and the company was stripped. |
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Asset stripping has been considered to be a problem in economies such the [[United Kingdom]],<ref>{{Cite web |title=Asset strippers are preparing to feast on Britain's COVID-ravaged economy |url=https://www.opendemocracy.net/en/oureconomy/morrisons-private-equity-asset-strippers-preparing-to-feast-on-britains-covid-ravaged-economy/ |access-date=2023-02-02 |website=openDemocracy |language=en}}</ref> and the [[United States]], which have highly financialized economies. In these situations, finance capital focusses on shareholder returns, sometimes at the expense of the viability of bought out companies. |
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| ⚫ | 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 |
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==Positives and Negatives of Asset Stripping== |
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| ⚫ | Early innovators of asset stripping were [[Carl Icahn]], [[Victor Posner]], and [[Nelson Peltz]];<ref>{{cite book|last1=Stevens|first1=Mark|title=King Icahn|date=May 2014|publisher=Createspace|page=4}}</ref> all of whom were investors in the 1970s and 1980s. Carl Icahn performed one of the most notorious and hostile takeovers when he acquired [[Trans World Airlines]] in 1985. 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. |
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| ⚫ | Asset stripping |
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| ⚫ | However, |
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| ⚫ | 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 to gain net worth. However, the purchase would have had been severely detrimental to [[Chevron Corporation|Chevron]]; a customer of Gulf Oil. Therefore, Chevron stepped-in and [[Merger|merged]] with Gulf Oil for $13.2 billion, which at that time was the biggest merger between two companies.<ref>{{cite web|last1=Mattera|first1=Phillip|title=Chevron: The Big Oil Boys|url=http://www.multinationalmonitor.org/hyper/issues/1992/04/mm0492_11.html |access-date=30 October 2014}}</ref> |
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==BC Partners and Phones-4-U== |
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| ⚫ | 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 (law)|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.<ref>{{cite |
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This case in particular highlights the negatives involved with asset stripping, and the detriment it causes. Nearly 550 workplaces are at threat, with 5,500 people who could potentially lose their jobs; all of who live within the UK.{{Citation needed|date =December 2014}} |
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| ⚫ | 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 (law)|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.<ref>{{cite journal|title=Asset-stripping by bosses finished Phones4U|url=http://socialistworker.co.uk/art/39005/Asset-stripping+by+bosses+finished+Phones4U |journal=[[Socialist Worker]]|issue=2421|date=16 September 2014|access-date=30 October 2014}}</ref> Under the ownership of BC Partners, Phones 4u had very little [[Financial independence|financial freedom]] to expand and claim back the contract of EE. In September 2014 [[O2 (United Kingdom)|O2]], [[Vodafone UK|Vodafone]] and [[Hutchison 3G|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 had no alternative but to sell its individual assets and close down. The net worth of Phones 4u's assets, estimated to exceed £1.4 billion, provided BC Partners with the credit to pay off some of its debts and significantly improve its net worth.<ref>{{cite web|last1=Partington|first1=Adam|title=Ex-Phones 4U employee: How the retailer fell down around our ears, and BC Partners forgot to say goodbye |url=https://www.standard.co.uk/business/markets/exphones-4u-employee-how-the-retailer-fell-down-around-our-ears-and-bc-partners-forgot-to-say-goodbye-9787723.html |newspaper=[[London Evening Standard]]|access-date=30 October 2014|date=10 October 2014}}</ref> |
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==The Regulators of Asset Stripping== |
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{{update|section|date=December 2014|inaccurate=yes}} |
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All forms of financial takeover need regulating to ensure there is fair play throughout the process, and asset stripping isn’t any different. The FSA is the board that standardizes any asset stripping that may occur and have the power to sanction fines and issue court cases. The Financial Services Authority or ‘FSA’ is a body created in March 2000 that regulates the processes of the financial sector within the UK.<ref>{{cite web|last1=Alvin|first1=Mack|title=Financial Services Authority - FSA|url=http://www.investopedia.com/terms/f/financial-services-authority-fsa.asp|website=www.investopedia.com|publisher=Investopedia US|accessdate=30 October 2014}}</ref> Firms within the UK created the FSA to ensure consumer protection, financial stability, market confidence and reduced financial crime created the body. Although the FSA was created by firms it still answers to the UK parliament in order to ensure the markets are regulated appropriately.<ref>{{cite book|last1=Blazely|first1=Stuart|last2=Haynes|first2=Andrew|title=Financial Services Authority Regulation and Risk-based Compliance|date=December 2006|publisher=Tottel Publishing|edition=2nd|accessdate=30 October 2014}}</ref> |
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==In the United Kingdom== |
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==Asset Stripping and the Law== |
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The process of |
The process of asset stripping is not an illegal practice. If a corporate raider sells the target company's assets individually and pays off its debts the [[financial regulator]]s have no room for investigation. However, some firms perform the process illegally and if found guilty may incur a substantial fine or even prison.<ref>{{cite web|title=Asset Stripping |url=http://www.sfo.gov.uk/fraud/what-is-fraud/corporate-fraud/asset-stripping.aspx |publisher=Crown |access-date=30 October 2014 |url-status=dead |archive-url=https://web.archive.org/web/20141030194421/http://www.sfo.gov.uk/fraud/what-is-fraud/corporate-fraud/asset-stripping.aspx |archive-date=30 October 2014 }}</ref> |
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Asset stripping by private equity firms in Europe is now regulated pursuant to the [[Alternative Investment Fund Managers Directive]]. |
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===Phoenixing=== |
===Phoenixing=== |
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This is one of |
This is one of two methods a corporate raider can use to strip assets illegally. For this method to work, the corporate raider and the targeted firm must have the same director. Assets of the targeted firm are transferred to the corporate raider to ensure they remain safe from debt collectors.<ref>{{cite web|title=Asset Stripping|url=http://www.lawontheweb.co.uk/Fraud_Law/Asset_Stripping |publisher=Law on the Web|access-date=30 October 2014}}</ref> This process lets the corporate raider improve their net worth while leaving liabilities with the targeted company. |
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===Liquidation=== |
===Liquidation=== |
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This method acts on completely fraudulent terms, and results in a higher punishment from the |
This method acts on completely fraudulent terms, and results in a higher punishment from the [[Financial Conduct Authority]] (FCA). Here, corporate raiders take ownership of a company on hostile terms, transfer the assets 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.{{cn|date=August 2023}} |
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== See also == |
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* [[Corporate raid]] |
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*[[Junk bond]] |
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* [[Leveraged buyout]] |
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*[[Tunneling (fraud)]] |
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* [[Vulture fund]] |
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==References== |
==References== |
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{{Authority control}} |
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{{DEFAULTSORT:Asset stripping}} |
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[[Category:Corporate finance]] |
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[[Category:Business terms]] |
[[Category:Business terms]] |
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[[Category:Mergers and acquisitions]] |
[[Category:Mergers and acquisitions]] |
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[[Category:Corruption]] |
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Latest revision as of 03:14, 5 May 2024
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Asset stripping refers to selling off a company's assets to improve returns for equity investors, often a financial investor, a "corporate raider", who takes over another company and then auctions off the acquired company's assets.[1] The term is generally used in a pejorative sense as such activity is not considered helpful to the company.
The proceeds of the sale of assets may be used to lower the company's net debt. Alternatively, they may be used to pay a dividend to equityholders, leaving the company with lower net worth – i.e. the same level of debt but fewer assets (and weaker earnings) to support that debt. With a lower level of assets, some argue that the business is rendered less financially stable or viable. For example, the sale-and-leaseback of a building would lead to an increased rental bill for the company.
Asset stripping is a highly controversial topic within the financial world. The benefits of asset stripping generally go to the corporate raiders, who can slash the debts they may have whilst improving their net worth.[2] However, since asset stripping often results in thousands of employees losing their jobs without much consideration of the consequences to the affected community, the concept can be unpopular in the public sphere. One particular example of where asset stripping cost a significant number of workers their jobs was in the Fontainebleau Las Vegas LLC case.[3] After the takeover, 433 people lost their jobs when assets were sold off and the company was stripped.
Asset stripping has been considered to be a problem in economies such the United Kingdom,[4] and the United States, which have highly financialized economies. In these situations, finance capital focusses on shareholder returns, sometimes at the expense of the viability of bought out companies.
History
[edit]Early innovators of asset stripping were Carl Icahn, Victor Posner, and Nelson Peltz;[5] all of whom were investors in the 1970s and 1980s. Carl Icahn performed one of the most notorious and hostile takeovers when he acquired Trans World Airlines in 1985. 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 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.[6]
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.[7] 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 had no alternative but to sell its individual assets and close down. The net worth of Phones 4u's assets, estimated to exceed £1.4 billion, provided BC Partners with the credit to pay off some of its debts and significantly improve its net worth.[8]
In the United Kingdom
[edit]The process of asset stripping is not an illegal practice. If a corporate raider sells the target company's assets individually and pays off its debts the financial regulators have no room for investigation. However, some firms perform the process illegally and if found guilty may incur a substantial fine or even prison.[9]
Asset stripping by private equity firms in Europe is now regulated pursuant to the Alternative Investment Fund Managers Directive.
Phoenixing
[edit]This is one of two methods a corporate raider can use to strip assets illegally. For this method to work, the corporate raider and the targeted firm must have the same director. Assets of the targeted firm are transferred to the corporate raider to ensure they remain safe from debt collectors.[10] This process lets the corporate raider improve their net worth while leaving liabilities with the targeted company.
Liquidation
[edit]This method acts on completely fraudulent terms, and results in a higher punishment from the Financial Conduct Authority (FCA). Here, corporate raiders take ownership of a company on hostile terms, transfer the assets 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.[citation needed]
See also
[edit]References
[edit]- ^ "Asset Stripping". HarperCollins. Retrieved 30 October 2014.
- ^ Pettinger, Tejvan. "Asset Stripping". Retrieved 30 October 2014.
- ^ Stutz, Howard. "Removal of Fontainebleau's construction crane signals doom for ill-fated Strip hotel". Stephens Media LLC. Retrieved 30 October 2014.
- ^ "Asset strippers are preparing to feast on Britain's COVID-ravaged economy". openDemocracy. Retrieved 2023-02-02.
- ^ Stevens, Mark (May 2014). King Icahn. Createspace. p. 4.
- ^ Mattera, Phillip. "Chevron: The Big Oil Boys". Retrieved 30 October 2014.
- ^ "Asset-stripping by bosses finished Phones4U". Socialist Worker (2421). 16 September 2014. Retrieved 30 October 2014.
- ^ Partington, Adam (10 October 2014). "Ex-Phones 4U employee: How the retailer fell down around our ears, and BC Partners forgot to say goodbye". London Evening Standard. Retrieved 30 October 2014.
- ^ "Asset Stripping". Crown. Archived from the original on 30 October 2014. Retrieved 30 October 2014.
- ^ "Asset Stripping". Law on the Web. Retrieved 30 October 2014.
