Ben Graham on Liquidations

January 20, 2010 · Leave a Comment

Continuing with our discussion of investments in voluntary liquidations, we now review Ben Graham’s writings regarding voluntary liquidations. It is my personal view that to be the best you have to learn from the best (our entire resources section is dedicated to compiling the knowledge of the best investors). To that end, we now post a brief excerpt stemming from a Forbes article by Benjamin Graham during the Great Depression.

Should Rich But Losing Corporations Be Liquidated? (1932)

The stockholders do not have it in their power to make a business profitable, but they do have it in their power to liquidate it. At bottom is not a theoretical questions at all; the issue is both very practical and very pressing.

It is also a highly controversial one. It includes an undoubted conflict of judgment between corporate managements and the stock market, and a probable conflict of interest between corporate managements and their stockholders.

In its simplest terms the question comes down to this: Are these managements wrong or is the market wrong? Are these low prices merely the product of unreasoning fear, or do they convey a stern warning to liquidate while there is yet time?

Directors and stockholders both would recognize that the true value of their stock should under no circumstances be less than the realizable value of the business, which amount in turn would ordinarily be not less than the net quick assets.

They would recognize further that if the business is not worth its realizable value as a going concern it should be wound up. Finally, directors would acknowledge their responsibility to conserve the realizable value of the business against shrinkage and to prevent, as far as is reasonably possible, the establishment of a price level continuously and substantially below the reasonable value.

Hence, instead of viewing with philosophic indifference the collapse of their stock to abysmally low levels, directors would take these declines as a challenge to constructive action. In the first place, they would make every effort to maintain a dividend at least commensurate with the minimum real value of the stock.

For this purpose they would draw freely on accumulated surplus, provided the company’s financial position remained unimpaired. Secondly, they would not hesitate to direct the stockholders’ attention to the existence of minimum liquidating values in excess of the market price, and to assert their confidence in the reality of these values. In the third place, wherever possible, they would aid the stock-holders by returning to them surplus cash capital through retirement of shares pro rata at a fair price.

Finally, they would study carefully the company’s situation and outlook, to make sure that the realizable value of the shares is not likely to suffer a substantial shrinkage. If they find there is danger of serious future loss, they would give earnest and fair-minded consideration to the question whether the stockholders’ interest might not best be served by sale or liquidation.

However forcibly the stock market may be asserting the desirability of liquidation, there are no signs that managements are giving serious consideration to the issue. In fact, the infrequency of voluntary dissolution by companies with diversified ownership may well be a subject of wonder, or of cynicism. In the case of privately owned enterprises, withdrawing from business is an everyday occurrence. But with companies whose stock is widely held, it is the rarest of corporate developments.

Liquidation after insolvency is, of course, more frequent, but the idea of shutting up shop before the sheriff steps in seems repugnant to the canons of Wall Street. One thing can be said for our corporate managements–they are not quitters. Like Josh Billings, who in patriotic zeal stood ready to sacrifice all his wife’s relations on the altar of his county, officials are willing to sacrifice their stockholders’ last dollar to kept he business going.

The conclusion stands out that liquidation is peculiarly an issue for the stockholders. Not only must it be decided by their independent judgment and preference, but in most cases the initiative and pressure to effect liquidation must emanate from stockholders not on the board of directors. In this connection we believe that the recognition of the following principle would be exceedingly helpful:

 The fact that a company’s shares sell persistently below their liquidating value should fairly raise the question whether liquidation is advisable.

 Please note we do not suggest that the low price proves the desirability of liquidation. It merely justifies any stockholder in raising the issue, and entitles his views to respectful attention.”

 Ben Graham’s entire article can be found HERE.

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Categories: Liquidation · Special Situations · Value Investing
Tagged: Ben Graham, great depression, Liquidation, shareholders, Value Investing

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