From: scairns@is.morgan.com (Scott Cairns)
Subject: Re: Companies trading near book value
Organization: Morgan Stanley - IS
Distribution: usa
Date: Wed, 19 Aug 1992 19:27:07 GMT

In article <1992Aug13.182242.22197@constellation.ecn.uoknor.edu>, capskb@alliant.backbone.uoknor.edu (Keith Brewster) writes:
|> In article <l8l3u2INNpnm@exodus.Eng.Sun.COM> leons@hiroller.Eng.Sun.COM () writes:
|> >Is it possible (or even normal) for a company to trade below the
|> >book value?  It seems to me that the answer is no, since in this
|> >case it will be profitable for someone with lots of money to buy
|> >the company and just sell its assets.
|> >
|> 
|> I don't think it is as simple as that, although it seems like good logic.
|> If the company is losing money the book value could be deteriorating
|> with time. Also there may be considerable legal obstacles in place to 
|> prevent a potential liquidator from coming in and selling off the
|> company.

It's actually quite possible and happens all the time.  In fact, the
reasons why have little or nothing to do with the above suggestions.
If a company is losing money, that usually affects cash and liquid assets
which usually represent a very small percentage of the asset side of
the balance sheet which helps determine book value.  Also, the buyout
boom of the last decade should've taught you that are few "considerable
legal obstacles" in the way of potential liquidators.

My accounting courses are receding into distant memory at the moment
but suffice it to say that most assests a company owns are usually not
"marked-to-market".  That is to say that, in most cases, the assets
listed on the balance sheet do not reflect true market value measured
in "today's" market.  In some cases, the assets could *never* be
marked-to-market because there is no "market" in the strictest sense
of the word.

For example, commercial real-estate portfolios could never be marked-to-
market on a regular basis because it's so volatile and so subjective.
Shares of IBM are pretty generic assets but a 58 story, 10 year-old
office building in Dallas is not generic and you can't get a quote on
a beast like that from your local Schwab broker.

Even in cases where you would think the assets would be marked-to-market,
regulations (and common sense) permit organizations like banks, for
example, to only periodically value their assets if at all.   Loans on
a bank's balance sheet are a good example.  Could you imagine if Citicorp 
had to value its consumer loan portfolio of mortgages, auto loans, student
loans, etc. every day or even every month?  Usually, an annual mark-to-mkt
is sufficient from a regulatory standpoint.

In fact, Citicorp is a good example of this.  It has traded below book value 
for some time now (it may be around or slightly above now with the run-up in its
stock as of late).  The reason is that the stock market is correctly assumming that
if Citicorp were suddenly liquadated, its substantial assets could not
be sold for anywhere near where Citicorp carries them on its ledger.  Sure,
there'd be a "fire sale" factor in an extreme example like this but mostly it
would be due to the fact that the assets do not reflect reality anymore.

This also works in the reverse.  A major reason behind the boom in the early
'80s of leveraged buyouts was that the smart money knew that the assets many
organizations were carrying were way above book value due to the inflation of
the '70s and if you sold off the pieces (and thus forced a market valuation),
you could realize a substantial profit.


-- 
+------------------------------------------------------------------+
| Scott Cairns           	|   email: scairns@fsg.com         |
| Fusion Systems Group		|      or: scairns@is.morgan.com   |
| New York, New York, USA   	|                                  |
+------------------------------------------------------------------+
| Standard disclaimers apply.   				   | 
+------------------------------------------------------------------+
| Better not take a dog on the space shuttle, because if he sticks |
| his head out the window coming home, his face might burn up.     |
|    					- Jack Handey		   |
+------------------------------------------------------------------+
From: duanej@hpfcso.FC.HP.COM (Duane Jacobson)
Date: Thu, 20 Aug 1992 21:27:10 GMT
Subject: Re: Two basic questions **
Organization: Hewlett-Packard, Fort Collins, CO, USA