Asset stripping

Asset stripping refers to the practice of acquiring a company and subsequently selling off its individual assets, typically to generate returns for the acquirer rather than to continue business operations. The term carries pejorative connotations in corporate governance discussions. Corporate raiders and private equity firms have employed this strategy since the 1970s, with activity peaking during the leveraged buyout era of the 1980s.

Mechanism and process

The process begins when an acquirer identifies an undervalued target. Companies trading below book value attract particular interest. A weak management team or depressed market conditions often signal opportunity to asset strippers.

Acquisition proceeds through various methods. Hostile takeovers were common in the 1980s. Leveraged buyouts use the target's own assets as collateral for acquisition debt. Once control is established, the acquirer catalogs assets for potential sale.

Saleable assets include:

• Real estate holdings
• Intellectual property and patents
• Subsidiaries and business units
• Equipment and machinery
• Brand names and trademarks
• Customer lists and contracts

Sale proceeds serve multiple purposes. They reduce acquisition debt. They fund dividend payments to the acquirer's shareholders. Sometimes they finance further acquisitions.

Historical context

Origins in the 1970s

Asset stripping emerged as a distinct practice in the early 1970s. Victor Posner pioneered hostile takeover techniques in this period. Carl Icahn and Nelson Peltz developed the approach during the decade.^[1] These investors recognized that conglomerates often traded at discounts to the sum of their parts.

The 1980s boom

Corporate raids reached peak intensity between 1983 and 1989. Junk bond financing from Drexel Burnham Lambert enabled ever-larger transactions. Michael Milken's high-yield debt instruments provided raiders with unprecedented capital access.

The Trans World Airlines (TWA) takeover exemplifies this era. Carl Icahn acquired the airline in 1985. He immediately began liquidating valuable assets, including aircraft and international routes. Debt incurred during the acquisition was repaid through these sales. TWA eventually declared bankruptcy, though Icahn profited substantially.

T. Boone Pickens attempted to acquire Gulf Oil in 1984. His stated intention was to sell assets individually. Chevron intervened with a $13.2 billion merger offer, then the largest corporate merger in history. Pickens abandoned his raid but earned $760 million on his Gulf Oil stake.

Regulatory response

The Alternative Investment Fund Managers Directive regulates asset stripping by private equity in the European Union. Article 30 imposes restrictions on distributions, capital reductions, and share redemptions for two years following acquisition.

United States law takes a different approach. Asset stripping itself is not illegal. Fraudulent conveyance laws may apply if creditors are harmed. Fiduciary duties require directors to consider all stakeholders, though interpretations vary by jurisdiction.

Courts have intervened in extreme cases. Fraudulent transfer claims succeed when assets are sold below fair value. Piercing the corporate veil doctrines apply when asset stripping leaves operating entities unable to meet obligations.

Economic analysis

Efficiency arguments

Proponents argue asset stripping reallocates resources efficiently. Underperforming assets find more capable owners. Capital locked in conglomerates flows to higher-return investments. Management discipline improves when takeover threats exist.

Jensen and Ruback's 1983 research in the Journal of Financial Economics found target shareholders gained 16-30% in successful tender offers. They argued the market for corporate control benefited organizational efficiency.

Criticism and social costs

Opponents emphasize negative externalities. Jobs disappear when operations cease. Communities lose tax bases when facilities close. Long-term research investments are abandoned.

The LTV Steel case illustrates these concerns. After asset stripping in the 1980s, the company's pension obligations remained while productive assets were sold. The Pension Benefit Guaranty Corporation ultimately assumed $2.3 billion in liabilities.

Contemporary practice

Private equity firms continue modified forms of asset stripping. Dividend recapitalizations extract value without full liquidation. Sale-leaseback transactions monetize real estate while maintaining operations. These techniques are less destructive than classic 1980s raids.

The Toys "R" Us bankruptcy in 2017 renewed debate. Private equity owners had extracted $470 million in dividends while loading the company with $5 billion in debt. When the retailer collapsed, 33,000 workers lost jobs. Critics argued this represented asset stripping through financial engineering rather than direct asset sales.

{{{Concept}}} Primary topic {{{list1}}} Related topics {{{list2}}} Methods and techniques {{{list3}}}

References

• Jensen, M.C. & Ruback, R.S. (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics, 11(1-4), 5-50.
• Bruck, C. (1988). The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders. Penguin Books.
• Burrough, B. & Helyar, J. (1990). Barbarians at the Gate: The Fall of RJR Nabisco. Harper & Row.

Footnotes

[1] Carl Icahn, Victor Posner, and Nelson Peltz were among the earliest practitioners of systematic asset stripping, developing techniques that defined corporate raiding through the 1980s.