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A recent article from Bloomberg states that Deutsche Bank's share price is less than half its theoretical liquidation value.

According to Investopedia, liquidation value is defined as:

The total worth of a company's physical assets when it goes out of business or if it were to go out of business.

This means, that the liquidation value does not include intellectual property, goodwill and brand recognition. Which would be reasonable factors why a share price can exceed the total worth of a company's physical assets.

Now, a company's total value, which includes intangible assets, is represented by the company's stock price.

Wouldn't this imply that:

  • If one bought all shares of Deutsche Bank and sold all its physical assets could make a fortune? (assuming that such action would not affect the share price)
  • If a company's total value is less than that of its physical assets, the company's intangible assets are negative?

So the question that I would have asked is: How is it possible, that the stock price of Deutsche Bank is less than half of the worth of its physical assets?

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  • $\begingroup$ Have you considered the debts and liabilites owed by Deutsche Bank? $\endgroup$ – Giskard Feb 9 '16 at 19:56
  • $\begingroup$ The market prices frequently went below liquidation values in the 1950s-60s. Buffett called it "buying $1 for 50 cents". The reason is, most investors don't like troubled assets, other are not allowed to hold them. And "liquidation value" is calculated from the books, which may not reflect actual prices. $\endgroup$ – Anton Tarasenko Feb 10 '16 at 12:22
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A company can have a positive book value and still be in trouble because of insolvency. This is very common with banks. Banks operate by borrowing short term to buy long term assets. This is inherently risky and vulnerable to a liquidity crisis. A bank can show a profit and positive book value and still be in a world of trouble. If investors feel that a bank will not be able to rollover their short term debt, then the bank will be in trouble. Selling their long term assets will not be the answer because long term assets are by their very natural not very liquidable. You can never trust a bank's balance sheet nor their income statement. A more accurate assessment of a bank would be of their cashflow, maturity mismatching and credit rating.

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One way this can happen is if the firm's leadership is in a position to prevent liquidation. This happens a lot in closed end mutual funds. The mutual funds are worth less than liquidation value because the managers of the fund are in a position to block the liquidation and have an incentive to do so in order to protect their fees. See Discounts and Premiums on Closed-End Mutual Funds: A Study in Valuation by Kenneth J. Boudreaux for a detail exploration of this topic, though he finds that the fees are too small for this to be a plausible explanation for observed discounts below liquidation.

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A company must first pay off it's debt. This would be subtracted from the money earned from selling it's physical assets.

The value of the physical assets may be calculated from their market prices. However, during liquidation they may have to be sold quickly and therefore at a lower price than calculated.

The market price of the physical assets may lower between the present and when the company liquidates.

These would all lead to the stockholder receiving less money than the calculated liquidation amount.

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