Asset stripping

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Asset stripping is a method in which a company also known as a corporate raider attains another company, and then auctions off the acquired companies 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.

History[edit]

The innovators of asset stripping were Carl Icahn, Victor Posner, and Nelson Peltz;[2] all of who were investors in the 70’s and 80’s. Carl Icahn performed one of the most notorious and hostile takeovers when he acquired TWA in 1985. Here Carl 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, Mr 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 merge between two companies in history[3]

Positives and Negatives of Asset Stripping[edit]

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.[4] 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. An example of this can be found in the. 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.[5] After the takeover, 433 people lost their jobs when assets were sold off and the company was stripped.

BC Partners and Phones-4-U[edit]

In 2011, BC Partners acquired Phones-4-U for a fee in the region of £700 million. At this point in time Phones-4-U 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.[6] Under the ownership of BC Partners, Phones-4-U 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-4-U to sell their products. Due to the already poor financial situation of Phones-4-U, the company has now no alternative but to sell its individual assets and close down. The net worth of Phones-4-U’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.[7] 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.

The Regulators of Asset Stripping[edit]

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.[8] 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.[9]

Asset Stripping and the Law[edit]

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.[10]

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.[11] 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[edit]

  1. ^ "Asset Stripping". http://financial-dictionary.thefreedictionary.com. HarperCollins. Retrieved 30 October 2014. 
  2. ^ Stevens, Mark (May 2014). King Icahn. Createspace. p. 4. 
  3. ^ Mattera, Phillip. "Chevron: The Big Oil Boys". www.multinationalmonitor.org. Multinational Motor. Retrieved 30 October 2014. 
  4. ^ Pettinger, Tejvan. "Asset Stripping". www.economicshelp.org. Optimization Wordpress. Retrieved 30 October 2014. 
  5. ^ Stutz, Howard. "Removal of Fontainebleau’s construction crane signals doom for ill-fated Strip hotel". www.reviewjournal.com. Stephens Media LLC. Retrieved 30 October 2014. 
  6. ^ "Asset-stripping by bosses finished Phones4U". http://socialistworker.co.uk. Sherbourne Publications Limited. Retrieved 30 October 2014. 
  7. ^ Partington, Adam. "Ex-Phones 4U employee: How the retailer fell down around our ears, and BC Partners forgot to say goodbye". http://www.standard.co.uk. London Evening Standard. Retrieved 30 October 2014. 
  8. ^ Alvin, Mack. "Financial Services Authority - FSA". www.investopedia.com. Investopedia US. Retrieved 30 October 2014. 
  9. ^ Blazely, Stuart; Haynes, Andrew (December 2006). Financial Services Authority Regulation and Risk-based Compliance (2nd ed.). Tottel Publishing. 
  10. ^ "Asset Stripping". www.sfo.gov.uk. Crown. Retrieved 30 October 2014. 
  11. ^ "Asset Stripping". www.lawontheweb.co.uk. Law on the Web. Retrieved 30 October 2014.