Brandjack News

By Quentin Langley 

The Labour Party seems to understand that generalised business-bashing does not go down well with the electorate.They are "against business as usual". (I think that is how you punctuate it. They might have said "against business, as usual"). Instead of denunciations of capitalism, instead we got dencunciations of "asset strippers". It would have been interesting to ask Ed Miliband if he knows what a an asset stripper does.

If you are against bankruptcy – and I would guess that Ed Miliband is, though actually I am not – then asset strippers perform a very valuable service. They step in before a business goes bankrupt and redeploy the assets in a more productive way. The easy short termist view of bankruptcy and asset strippers is that they represent the end for a business, but they do not. They lead to the assets being redistributed from unproductive use to people who believe they can use them more effectively. It is not the end for the assets or the business. It is merely a new beginning.

Let us take the example of a business which, this summer at least, was ripe for a take over bid from an asset stripper: BP.

This blog reported on 30 July that BP had a market valuation of $250 billion, a full $100 billion less than the value of its assets. 

If an asset stripper launched a take over bid for BP, there would seem to be a number of possible outcomes:

1. The market takes another look at BP and concludes it is undervalued; the bid fails.
2. The management launches a new plan which the market concludes is robust; the share price rises and the bid fails.
3. The bid succeeds with the bidders paying existing shareholders a premium over the current value; the new management team launches a new plan.
4. The bid succeeds with the bidders paying existing shareholders a premium over the current value; the company is broken up with other bidders buying up the assets.

Obviously, in the event of number four, the other bidders would probably be other oil companies. No-one would be likely to take over an oil field or refinery in order to close it down. Some people might lose their jobs, but most or all of those jobs would be replaced as the assets are used more productively. Indeed, if the assets are put to better use, it might lead to more employment. In none of the above cases does BP's business get closed down.

Widening the discussion from BP for a moment, opportunities for exapansion are particularly likely in the case of that most politically controversial take over, the foreign take over. A competitor in the same market may well want to contract capacity, but a foreign bidder may want to take the biddee's products and launch them internationally.

The problem with government entities and charities is that they don't have asset strippers. Excellent organisations will excel, whatever their organisational structure. That is their nature. Failing organisations can close and their assets be bought by others – though governments often prevent this from happening to failing government owned entities. But most organisations are neither excellent nor failing. Most, in the nature of things, are mediocre. In neither the government sector nor in the non-profit sector is anything ever done for the mediocre majority.

A mediocre business can be taken over and relaunched by a new management team. Outside the for profit sector, structures don't exist to bring about this challenge to organisations towards the middle of the bell curve. Schools, hospitals, and all sorts of important services which are typically run by governments or charities suffer from this neglect of the mediocre majority. They could do with some asset strippers.