What Is Breakup Value?
Keywords: breakup value
If you are new to investing, you may have heard of breakup value, but have no idea what it means. Sounds bad, huh? If there is much discussion about the breakup value of a company, it could mean that the company is having problems and is about to be sold off.
..
Simply put, the breakup value is what a company would be worth if its component parts were sold off and the liabilities were paid. For example, a certain company may have multiple subsidiary businesses operating in different industries. It may have a computer division, a food division, and an entertainment division. To determine the breakup value, you would need to figure out what the total assets are for each subsidiary, minus the total liabilities.
When a corporation or conglomerate is sold, sometimes it is sold for cash, or for stock in the acquiring company, or both. As an example, if company A is sold to company B, company A may receive a certain amount of cash for the sale, along with a certain amount of common stock in company B. Company B might decide to give all of the shareholders of company A a single share of stock in B for every four shares they have of A.
There are certain situations that may cause a company to be broken up. In the event it does split up, you should find out what the breakup value will be and how it will affect the value of your stock. We will now review each of the possible situations so that you will remember to consider the breakup value of a company before it is sold.
If the corporation is being poorly managed, the board of directors may decide to sell off the company to get something for their stock or to get stock in another company that has competent management and can help their stock grow in value.
Another situation that may arise is if one of the subsidiaries within the corporation has liquidity problems and can not be salvaged, the entire company is affected. As a result, the corporation may have to sell several of their businesses in order to restore the bottom line.
Another reason why a company could be broken up is if one of the divisions within the company, although it might be profitable, is holding back the growth of the other divisions. As a result, the board of directors may decide to sell off or destroy the part of the company that is holding it back so that it can experience much larger growth in its other sectors.
Also, if one of the businesses that the company owns is facing a potential lawsuit, the corporation may decide to break off that business so that the other profitable segments within the company are not financially vulnerable to any judgement rendered against the business that is about to be sued.
Breakup value does not always have to be a bad thing, it can also be used as a way to assess the financial strength of a company so that you can determine whether to hold on to its stock. If the share price of a stock is trading at a discount relative to its total assets minus liabilities, then you should probably hold on to the stock, unless the company has a negative outlook for the future.
I hope what you have learned here was helpful and informative. If you can not determine the breakup value of a company on your own, ask your portfolio manager or stockbroker to get the number for you. You should know this information even if the company in which you are invested is doing well, because if the company folds quickly, it will be hard to sell the stock. If that happens, it is possible that the only way that you will be able to recoup your investment is when the assets are liquidated so that the bondholders and shareholders can be compensated.
Jim Pretin is the owner of www.forms4free.com, a service that helps programmers make free HTML forms.
Previous Articles Highlighter:
The FOREX Market Is A Goldmine (1)
As with stock prices, currency exchange prices have a bid and ask spread. The current bid is the amount of foreign currency that someone is willing to spend in order to buy $1 U.S.
Stock Market Basics (2)
A full-service broker offers a wider array of investment vehicles for you to put your money into, such as stocks, bonds, derivatives, annuities, and some also sell life insurance. A discount broker, on the other hand, does not have access to all these investment vehicles.
Introduction To The Forex Market (3)
A direct quote uses the domestic currency as the base and the foreign currency as the quote. An indirect quote works the exact opposite way. So, if you were to view a quote in an American newspaper that said USD/JPY = 75, that would be a direct quote and would mean that $1 of U.S.
Is Your Stockbroker A Crook? (4)
A good broker not only is concerned with making themselves money but is also motivated to help your portfolio grow. Use the information presented in this article to help you determine whether your broker is a sage financial professional or a crook.
Understanding Your Insurance Policy (5)
For example, if you hit a pedestrian with your car, the insurance company for the pedestrian retains the right to sue you to reimburse them for any expenses incurred by the injured party as a result of the accident.
What Mergers Mean For Your Investments (6)
Sometimes two businesses that are close to or equal in value come together and form a new corporation with new stock. Other times, one company in the transaction is significantly larger than the other, and it buys the stock of the other company and absorbs all of its assets and businesses by issuing stock from the larger company to shareholders of the smaller company.
Introduction To Day Trading (7)
Others look for changes in momentum and will hop in at the beginning of an upswing and then ride it out until the upswing is over. This is known as momentum trading.
Introduction To Mutual Funds (8)
Other funds invest solely in foreign companies, while some invest in certain sectors within the economy, such as the financial, technology, or industrial sectors. Also, some mutual funds may pick companies based on ideology, such as a socially responsible or environmental fund.
Tax Consequences Of Municipal Bonds (9)
The capital gains tax on a long-term gain is 15% (selling a security after holding it for at least 1 year is a long-term gain), whereas the tax on a short-term gain is 35% (selling after holding a security for less than 1 year).
P/E Or PEG, Which Is Better? (10)
The P/E falls short in this regard because it does not take into account by what percentage earnings are growing each year. Increasing earnings are the driving force behind an increase in the price of a stock.
Common Investment Scams (11)
However, they will likely invest your money in high risk, speculative investment vehicles that have absolutely nothing to do with prime banks. Avoid prime bank solicitations like the plague.
Understanding Auto Insurance (12)
After uninsured motorist coverage you should see something called personal injury protection (PIP). Some states required this coverage, some do not. In states that require it, it is best to maintain $250,000 of PIP coverage.
Penny Stocks: A Good Investment (13)
You can also look for the information on message boards or forums where stock traders chat with each other. Simply do a search on Google and read every article ever written about the company, and you will likely find out about their float.
Understanding A Balance Sheet (14)
The software business might have to meet a lot of short-term liabilities, such as paying programmers and investing in technology, in order to meet future sales goals. Once the software is finished, those liabilities might disappear, making them profitable.
Introduction To Stocks (15)
Companies pay out a percentage of their earnings to shareholders in the form of a dividend. There are two different types of stock: common stock and preferred stock. Common stock represents ownership in a corporation.
How To Get Real Estate Listings Via Real Estate Marketing Articles (16)
Well, I have good news and bad news for you. The good news is that there isn't any one best way to get real estate listings. There's something to be said for having multiple streams of leads and listings.
Holiday Insurance - A Necessity Or A Luxury? You Decide (17)
It's a little bit amazing how often that can happen. Be informed: Cancellation insurance is different from the cancellation waiver that some travel agencies will offer. A conscientious traveler knows the difference.
Cashback Credit Card For Reward-Loving Individuals (18)
However, there will be an applicable APR after the introductory period, which is around 10.8 percent, depending on the credit card company. Another variation of cashback credit cards are those offered within a specific vendor, such as a vehicle manufacturer.
The Benefits Of Gathering Relocation Information (19)
Stress can occur any time during the process of relocating. Even those who are eager about moving may find themselves overwhelmed by the small details. That is why gathering relocation information beforehand can help reduce the amount of stress associated with moving and let you focus on other things such as, saying goodbye to friends and family, and taking care of last minute details.
Credit Card Types: Unsecured (20)
Finance Charge: Your unsecured credit card may include finance charges that are above and beyond the APR. Finance charges are most often triggered when you take out a advance.
Newer Articles Highlighter:
How To Select Mutual Funds (1)
Talk to your broker and see if he or she can help you identify the best investment vehicle for you. Just make sure you review the fee structure of the mutual fund you are interested in before you invest.
Why You Should Invest In Penny Stocks (2)
A patent will prevent other companies from producing the exact same product. 3) Consumer Demand: Will there be a demand for what the company is selling? Sometimes a company has a great new invention or an exciting technology, but if it is not something practical that consumers are going to want or need, then it does not matter how great it is.
Why I Like Penny Stocks (3)
Number one, you need to do some research and try to find out how many shares the company has in its float. The float is the number of shares that are currently being traded.
Learn To Avoid Market Timing (4)
In the long run, dollar value averaging usually works better than cost averaging because value averaging results in less money being invested as the stock price goes up, whereas with cost averaging you continue to invest the same number of dollars regardless of the share price.
How You Can Avoid Market Timing (5)
So, it is not always a winning strategy to spread your purchases over a period of time. Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment.
Penny Stocks Can Be Lucrative (6)
Foreign companies often have some of their shares sold in the United States by listing them on the Pink Sheets. The OTC (Over-The-Counter) Bulletin Board is similar to the Pink Sheets.
The Truth About Bonds (7)
However, if the economy is slowing down and there is very little inflation or maybe even deflation, then the Fed might decide to reduce interest rates to create a stimulus for economic growth.
Risk Factors Associated With Bond Investing (8)
The Federal Reserve (also known as the Fed) meets every 6-8 weeks to evaluate the health of the economy. At each meeting, the Fed renders a decision regarding interest rates.
Strategies For Investing In Mutual Funds (9)
They are different than stocks when it comes to fees and expenses. As with stocks, funds are subject to capital gains taxes. But a fund is sometimes subject to a front-end and/or back-end load.
How I Reduce My Investment Risk (10)
But, by spreading the purchase over a three month period, I managed to buy IBM at an average price of $100 per share. The primary drawback of using DCA is that you may not be maximizing your overall return.
Introduction To Foreign Currency Trading (11)
Also, unlike the stock market, the foreign exchange market is open 24 hours per day, because it is a global market. A trader in Hong Kong may be exchanging currency with a trader in Australia while an American trader is sleeping.
Bonds Can Be As Risky As Stocks (12)
However, you should also take into account the risk factors we have covered. Your portfolio should contain a mix of corporate, federal, municipal, and even junk bonds (there is always a default risk associated with junk bonds, but they pay a huge interest rate).
What Is The Purpose Of Umbrella Insurance? (13)
The coverage is cheap. It is possible to obtain 1 million dollars worth of excess liability for as little as $120 dollars. The more cars and homes you have, the higher the price for the insurance, but the cost is still low.
Is Bond Investing Totally Safe? (14)
The most important thing to take into account is the interest rate. The Federal Reserve (also known as the Fed) meets every 6-8 weeks to evaluate the health of the economy.
What You Need To Know About Day Trading (15)
Day traders dabble in a number of different financial instruments, such as stocks, currencies, stock options, and futures contracts such as interest rate futures, equity index futures, and commodities futures.
Mutual Funds Make It Easy To Diversify (16)
The earlier you begin, the more money you can potentially make down the road. Carefully examine the fee structure and investment strategy before investing and you should do fine.
Can You Lose Money Investing In Bonds? (17)
If you are able to hold your bond until maturity, then interest rate movements do not really matter, because you will redeem the principal upon redemption. But often, investors have to cash out their bonds well before the maturity date.
Internet Investment Scams (18)
Typically, you will be asked to invest a certain amount of money, and then you are promised a return when new investors make an equal contribution. Eventually, the pyramid either collapses or the person who initiated the pyramid is able to make a lot of money, but no one else makes anything.
Is The PEG Ratio Better Than The P/E (19)
For example, if a company has a P/E ratio of 30, and annual earnings-per-share growth of 50%, then the PEG would be 0.6, making this company an excellent buy because it is undervalued and the stock price will almost definitely climb.
Bonds Are Equally Risky As Stocks (20)
If interest rates have moved up since you purchased the bond, and you sell it prior to maturity, then the bond will be worth less than your initial investment. You should also be aware of the claim status of the bond you are buying.