Asset Stripping

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The process of buying an undervalued company with an intention to sell off its assets and generate profit for the shareholders is known as asset stripping. The individual assets of the company such as its equipment, real estate, intellectual property or brands, would be more valuable than the company as a whole due to certain factors like poor management or economic conditions. Its result is often a dividend payment for the investors and either a less-viable company or bankruptcy.

Asset stripping is an action that is often engaged in by corporate raiders who buy undervalued companies to extract value out of them. This was very popular during 1970-1980s and is still seen in some of the investment activity conducted by private equity firms.This activity makes a company weak, especially one that has less collateral for borrowing and may have its value-producing assets stripped out, making it less able to support the debt the company has. The proceeds gained from asset stripping would be used to pay down the company’s debts and also, it will be utilised to pay off the shareholders with dividend. For example, retailers owned by private equity companies that have engaged in asset stripping and recapitalization are more likely to default on debt.

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