Once in a while you'll see a remark from me on the stream, or on this blog, that a stock is "going to zero". Not many companies that once traded above a 300M market cap end up seeing their equity become literally worthless, but it does happen. Why don't many companies see this take place? Mostly because PE shops are pretty good at chopping them up and selling them for parts before that takes place, and they are willing to take the company out at a modest premium.
But I believe there is a shifting dynamic-- caused by the speed and power of disruption which is taking place right now-- that will cause more companies to literally trade to zero. Instead of slowly withering away, more than ever we see companies getting run over at lightning speed, having their cashflows go grossly negative. These are no longer situations where the company has flat-lined, they are nosediving.
Because of this it's my belief that you're not going to see them get taken out by PE shops, and especially not by competitors looking to pick from their carcass. These days, you can build something fast enough that taking on the liability of a money losing business for some of its assets doesn't look too tempting.
I'll bring up a few examples of where I believe companies have made mistakes, and are obviously regretting making acquisitions of this kind, and current companies that I believe will trade to zero and won't get taken out. HP (NYSE:HPQ) buying Palm is the perfect example of an acquisition of this kind that the company will forever regret. Palm was a quickly sinking ship with some good assets, but with the speed at which the company was bleeding cash, it ended up being worth less than nothing to HP.
Why hasn't Research In Motion (RIMM) been taken out? Because everyone saw what happened with Palm. RIMM is worth nothing but the patents, but even less than the patents because the company is burning a lot of cash now.
For a few years I've heard many say that Radio Shack (NYSE:RSH) would get taken out by a PE firm for its real estate assets. Good luck with that call, as the company is now shedding cash faster than you can say BestBuy (NYSE:BBY). It's not worth dealing with shutting down the business for the assets, it's a mess, the equity is going to zero.
Wait, did someone say BestBuy? That'll be the same story.
How about Monster Worldwide (NYSE:MWW)? The company has some great assets over there that LinkedIn (LNKD) would love, right? But what's the point when LinkedIn can capture Monster's user base over the next few years for free? The flow of users on the internet is highly liquid, they aren't trapped inside Monster. They will move, there's no reason to buy them.
In a world where companies can rise and fall this quickly, and where the threat of disruption is definitely underpriced, I believe we're going to see fewer buyouts of failing companies than we used to. PE shops will pick their spots more carefully, and large corporations will not buy out failing companies for their assets because god knows they don't want to deal with the anchor of their money losing businesses.
More companies than ever before will trade to zero.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.