What Is Asset Stripping?

Malcolm Tatum

Asset stripping is the process of evaluating the assets held by a corporate entity and choosing to sell off those assets in order to generate some sort of profit from the acquisition of that company. Corporate raiders often make use of this particular strategy by purchasing a company and beginning to sell off certain assets not essential to the ongoing operation of the business. In some cases, this stripping away of assets generates enough income to cover the expenses of the acquisition, leaving the raider with the ability to resell the pared-down company for a clear profit.

Man climbing a rope
Man climbing a rope

One of the easiest ways to understand how asset stripping works is to consider a company that operates both a main operation and two wholly owned subsidiaries. When a corporate raider evaluates the value of both the parent and the subsidiaries, he or she may believe that is it possible to take over the entire operation for a certain sum, then sell off the two subsidiaries in order to cover that purchase price. This form of asset stripping would leave the parent corporation so that the raider could continue to operate in order to generate a steady flow of revenue, or be sold as a stand-alone entity that would provide the raider with a substantial amount of profit, since all the costs of the acquisition were covered by the sale of the two subsidiaries.

A slightly less severe form of asset stripping is sometimes employed by companies that need to generate additional revenue to survive a difficult economic period. In this scenario, the company would evaluate all assets in terms of how essential they are to the core operation of the company. Any assets that are not essential to the operation and are likely to command a reasonable price on the open market may be sold as a means of creating a source of income to ride out a slow economy. While leaner than in the past, the company then has a chance to adjust operations so that it can remain viable long enough for the oppressive economic situations to reverse and the company to once again be profitable.

In general, references to asset stripping tend to be perceived in a negative light. This is because the process is often utilized after a hostile takeover and can lead to dismantling of companies which in turn leads to higher unemployment and job losses in the communities where those companies operate. For this reason, many companies seeking to sell nonessential assets in order to remain operational will avoid using this term and tend to refer to their activities using more innocuous terms like "asset reorganization" or "asset downsizing."

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