For many people an asset-backed company is one which offers a degree of safety but unless those assets are working for the better of the company it may be time to reconsider the structure. If we put aside real estate companies from this argument, because they are quite literally valued on their assets, it does open a very interesting debate.
Sale and lease back
It is no surprise that we have seen many large retailers around the world selling and leasing back their stores to release capital. Over the years they will have built up a significant property portfolio but in reality, if you sit back and think of it in more detail, there are millions of dollars tied up in buildings. Could these funds be better used to build and grow the business?
Cash flow is king in any business and while it is good to have a degree of asset backing there needs to be a balance between assets and cash flow. If a company is not expanding but it has a significant property portfolio this could make it susceptible to a takeover bid to literally asset strip the business. In this instance, you would likely see a hostile takeover which if successful would lead to a sale and lease back of the property assets or even an outright sale. In some case we have seen property assets and business assets separated into two different groups with the sum of the parts often greater than the value of the combined group.
Pension surpluses
Over the years the regulations surrounding company pension schemes have changed and it is not as easy to release surplus money from these assets. However, those who have followed the stock market for many years will be aware of a trend in the 1980s where we saw a number of hostile takeovers with the intention of releasing surplus funds from company pension schemes (those which were overfunded). While controversial, this is a prime example of a company not utilising assets to their full and being susceptible to a takeover.
Growing the business
Whether we are looking at a retail business, marketing agency or utility company, there are very few businesses where there is a need to own real estate out right. In the vast majority of business situations the funds tied up in real estate could be better utilised elsewhere within the group and in many situations a sale and lease back agreement might be appropriate. We have seen supermarket groups follow this path, McDonald’s has also utilised this strategy and in reality for many companies it makes perfect sense.
When debt can also be an asset
On a side note, no serious business should be scared of taking on debt as long as that debt can be funded and invested with a net return. There are very few large businesses trading today which would have been able to grow so quickly without at least taking on some level of debt. The idea that a company with net assets and net cash on the balance sheet offers a high degree of security is technically correct, but others would suggest this reflects an ultraconservative expansion policy.
Where possible net cash and net asset should be reinvested to grow the business and improve returns. There are times when this may not be the right move but in general having money tied up in a physical asset is not always the most sensible option.