Worthless companies

• DOI: http://doi.org/10.1111/eufm.12167
• Author: J. B. Heaton
• Published date: 01 November 2018
• Date: 01 November 2018

DOI: 10.1111/eufm.12167

ORIGINAL ARTICLE

Worthless companies

J. B. Heaton

Managing Member, Conjecture LLC,

Chicago, Illinois.

Email: jb@conjecturellc.com

Abstract

Companies with worthless assets can have substantial effi-

cient markets equity values and debt that trades near par if

there is a probability that an irrational bidder will acquire

the company. Even if most capital market participants recog-

nize that the company’s assets are worthless, efficient mar-

kets pricing of the worthless company’s equity and debt pre-

cludes arbitrage, and it may be impossible to persuade the

potential irrational bidder to abandon its plans. The worth-

less company hypothesis may shed light on the valuation of

some high-profile start-ups, the 1990s dot-com bubble, and

the bad performance of some short sellers.

KEYWORDS

mergers & acquisitions, bad bidders, bubble company, unicorns, short

selling

JEL CLASSIFICATIONS

G02, G32, G34, K22

1INTRODUCTION

Consider a firm with a market value of equity of more than $1 billion. The firm has sales under $1

billion and has never been profitable. The firm describes its mission as ‘to make incredible home

cooking accessible to everyone’ and its business is to sell its meals to customers who will buy ready-

to-prepare meals ‘instead of shopping at grocery stores, ordering takeout, or eating at restaurants’.1Or

consider a firm with a market value of equity of more than $8 billion with revenues of just over $1

billion. The firm is not profitable and describes its mission to ‘be the traveller’s first and independent

source of information for finding the ideal hotel at the lowest rate’.2Finally, consider a firm with a

market value of equity of more than $2.4 billion, sales of less than $500 million and also no profits,

I thank an anonymous referee and John A. Doukas (the Editor). All errors are my own.

1Amendment No. 4 to Form S-1, Blue Apron Holdings, Inc., dated 28 June 2017, pp. 1-4, available online at: https://www.sec.

gov/Archives/edgar/data/1701114/000104746917004287/a2232570zs-1a.htm. Prices, equity, income, and market capitalization

from Bloomberg; market capitalization as of 30 June 2017.

2Filing pursuant to Rule 424(b)(4), travel B.V. doing business as ‘trivago’, dated 16 December 2016, p. 1, available online

at: https://www.sec.gov/Archives/edgar/data/1683825/000119312516795038/d246736d424b4.htm. Prices, equity, income, and

market capitalization from Bloomberg; market capitalization as of 19 July 2017.

Eur Financ Manag. 2018;24:721--727 wileyonlinelibrary.com/journal/eufm © 2018 John Wiley & Sons, Ltd. 721