What is Bi-Strip-and-Flip?
Buy, strip and flip is a phrase used to describe the common practice of private equity firms buying undervalued companies, spinning off their assets, and then quickly selling the restructured company in an initial public offering (IPO).
Key Takeaways
Buy, strip, flip is a phrase used to describe the controversial business practices of some private equity firms. These investors buy undervalued companies, extract value from them, and then quickly sell them in an IPO. The primary objective is to line the pockets of the private equity firm as much as possible, as quickly as possible. Not surprisingly, this objective tends to be detrimental to the long-term future of the acquired companies.
How Buy, Strip, and Flip Works
Private equity firms are often portrayed as predators that quickly and ruthlessly plunder companies, resell them and move on to their next victim.
These investment firms often acquire target companies using a leveraged buyout (LBO) — putting in a small amount of their own money and borrowing the rest, saddled the acquired company with a lot of debt — and then sometimes taking out more loans to cover special dividends and taking steps to streamline the business and cut costs and become more efficient.
In some cases, the target company is stripped of unnecessary parts and assets are sold or shut down in order to streamline the business model and reduce expenses. This process can be very lucrative for the private equity firm, with the added benefit that the acquired company may become more attractive to potential buyers once carved out by the IPO.
important
In a buy, strip, and flip scenario, the acquired company is typically held for only a year or two before the IPO.
Essentially, private equity firms use target companies for their own gain, and decisions about how to treat the target company are made not necessarily with the goal of boosting the IPO valuation after the company goes public, but with the goal of lining the pockets of the private equity firm.
Criticism of buy, strip and resell
Naturally, buy-strip-flip strategies get a lot of attention. Leveraged buyouts have a history of forcing the acquired company into bankruptcy by making it responsible for all of its debts, particularly in the 1980s, and continue to occur today.
Retailers in particular have a history of being ruined by private equity firms: The list of victims is long and includes Fairway, Payless ShoeSource, Toys R Us and Sports Authority.
Critics argue that private equity firms are only interested in making short-term profits and will do whatever it takes to get there: By plundering balance sheets and focusing only on short-term wins, they may be able to make decent profits, but they also put the long-term health of their target companies at risk.
In essence, acquirers, strippers and resellers squeeze the blood out of target companies, empty them of their assets and then often exit before the effects of such actions cause the companies to collapse.
Special Considerations
Not all private equity firms are bad and do business this way – sometimes they make investments that benefit their target companies in the long term and even make a profit when they sell.
Proponents of private equity buyouts argue that it's a necessary force — forcing management to shut down underperforming businesses and allocate capital in smarter ways isn't without controversy — but sometimes such drastic measures are necessary for a company to thrive in the future.
An example of a company that has thrived after being bought by private equity is Dollar General (DG): the discount store was purchased by KKR in 2007, sold for a tidy profit, and is now one of the fastest-growing retailers in the United States.