Expert: Steve Hach - 12/5/2008

Question
My question is, what exactly is meant by a company being worth more dead?  I have found a few companies I want to invest in which appear to be worth more if they were bought out by another company because they do not have much debt at all and their share prices are selling for less then current assets and less then fixed assets.  Am I correct in assuming that going bankrupt is not the same as a company being "dead?"  Wouldn't a company need substantial debt to go bankrupt?

Answer
Hi Alex,

You have the right answer/concept with "dead"

If they go bankrupt they have to pay creditors but they are protected from having their working assets taken.

So if "dead" you can just dismantle factories and sell land/buildings etc.

If they are bankrupt they are working on ways to pay creditors but the creditors cannot just seize their factories and such.

For example, right now it is quite possible given the low market cap that GM's land, factories, and other assets are worth more than the stock price.

But, if they declare bankruptcy that stuff will not be sold, they will just restructure their debts/business in a manner that will pay their creditors long-term while remaining in business.

Best,

Steve