Asset Sales

Discussion

Companies cite many reasons for divesting corporate assets, including the need to raise capital, getting rid of an unprofitable business, and repayment of debt. However, the majority of asset sales boil down to two plausible explanations. First, the asset in question is causing diseconomies of scale or negative synergies, i.e., the asset is not only failing to generate adequate returns but is also harming the value of the company as a whole, possibly due to a lack of strategic fit with the company's other units. Second, the company simply thinks it can sell the asset for a large gain to a buyer who can make better use of it.

When companies propose to sell off assets, shareholders should examine the stated reasons for the sale, the planned use of the sale proceeds, and the value received for the asset. The following asset sale rationalizations should be seriously questioned:

• Balance Sheet/Working Capital. Companies may argue that the sale of an asset may improve its balance sheet through the repayment of debt or through an increase in working capital. Disinvestment can be an expensive way of accomplishing these goals. A majority of asset sales are made by companies with access to the capital markets. There is no advantage to selling an asset to raise capital or to repay debt unless the asset can be sold at an above-market price.

• Exiting Capital-Intensive Businesses. If a business unit is capable of earning an adequate return, then a company should be willing to undertake the capital requirements.

In reviewing asset sale proposals, shareholders should look for potential elimination of diseconomies and examine the value received for the asset. As with the examination of mergers, asset sale proposals are often accompanied by an investment banker's opinion which will compare the sale transaction with similar deals. Shareholders should also examine the proposal for evidence that the asset was shopped around and that the deal terms were negotiated at arm's-length.