How can a loss Making Company be an Attractive Target ?

Loss-making companies can be an attractive target?and the reason for the same are multifold as just looking at the profits of the companies is a very inadequate, orthodox albeit safe way of doing business. So sometimes taking risks in present loss-making entities reap much more financial benefits in future, of course, it doesn’t come without its own risk factor.

So, here are a few reasons why a loss-making company is an attractive target.??

Growth?– Nowadays in both saturated and unsaturated markets it is more about market grabbing than getting profits. And easiest way to grab the market is by providing ridiculously high discounts in a competitive market. So, even though initially they suffer high losses, they have grown in revenue and market share which gradually over the years can be easily converted into a profitable venture, once you have developed a loyal customer base.?

Future potential?– Some companies, especially in the case of unsaturated markets, especially try to look at future potentials of the companies rather than what they are contributing in the present.

This would generally be in case of newer ventures like Artificial intelligence, E-Wallets, drones etc. or even industries like e-commerce which is still in the growth stage. So, sometimes you have to bet on how these companies will attract clients in the future to get a first mover’s advantage.

Tax benefits–?Sometimes, depending on the laws of the country, countries allow the acquirer to reduce the tax by reduction of profits when a company acquire a loss-making entity by addition of profit of one company to the loss of the another. So, this leads to a deduction of profits which further leads to a reduction in tax payable.

Generally, such benefits arise due to :

Unused tax losses, unused tax losses, unused debt capacity, surplus funds, and the write-up of depreciable assets.?Tax carry forward helps the acquirer to offset the income it plans to earn which will help in saving taxes. So, sometimes a loss-making entity becomes a very attractive target due to their ability to help in tax gains.?

Valuations of Intellectual Property Rights– This might be one of the few reasons which don’t involve huge risks for the investors as some companies despite being loss-making have some intellectual property rights like patents or copyrights which have huge valuations in the market. So, then it is not rocket science to understand that even though they might be loss-making but investing in them is usually a clever idea as you are not betting on them but you are betting on their Intellectual property rights which would be a good bet in spite of their losses.

Asset Stripping?–?Asset stripping can be understood as a practice where undervalued or loss-making companies are brought with the sole intention of selling the assets to generate the profits.

This is usually done in a case where the value of assets separately of the companies is much more than the company as a whole, reasons of which can be poor economic conditions, poor management etc.?

Goodwill– Some companies have high market goodwill with them despite being loss-making. The best example of this could be Nokia.?So, buying such companies is more about the use of the goodwill then about their assets and liabilities.

Generally, the investor backs such companies to cash in on the goodwill of such companies which has been built over the course of multiple years and generally with the right management companies can be turned around. So, high market goodwill can make a loss-making entity attractive.

High Liquidity– Liquidity, refers to the availability of liquid assets with a business. Some businesses like banks, Investment companies etc. have high liquidity and some times larger companies when they are in a cash crunch and in order to get out of the situations can easily acquire smaller companies which have high liquidity using stocks and shares and benefit from their liquidity to get out of their cash crunch problem.

Sometimes this is also done to maintain the liquidity ratio which might have decreased generally in a year in which outflow of cash was very high with minimal/ low inflow. So, that is why even if companies are loss-making on the balance sheet but their high liquidity makes them an attractive target.?

Potential Market Valuation?–?What these showcases that profitability as a sole criterion has been long gone and people look at other things like exponential growth rate, gradual turn into profitability. What these promises are huge returns on investments for any investors.

Furthermore, in the case of companies making losses for growth and expansion may seem bad on the balance sheets, but it is doing wonders for the valuations of such companies.?So, a loss-making entity can be very attractive as a target if you won’t make a quick gain out of their good market debut but of course, this gamble won’t be without its own risk.?

Competition?– Sometimes, despite being a loss-making entity company have a huge potential of growth. So to the other profitable companies in the same sectors, these loss-making companies might seem like a very attractive target to remove any future competition in the present itself.

They would prefer to splash some money now to lose it later. So, despite being loss-making at present companies might get the attention of the competitors, who would prefer to remove the competition before it becomes a problem.?

The ‘money’ in the world of mergers, acquisitions and investing, it seems doesn’t depend on the present but is more a bet on the future on what the companies would provide in the future.

So, the present loss-making has generally stopped worrying any of the bigger investors as there are ready to wait and play the long game and earn big. Further, in businesses the oldest mantra is HIGHER THE RISKS, HIGHER THE RETURNS and investing in loss-making companies might be a risk but may provide exceptional returns.?