Do 'fire sales' really destroy value?

Selling distressed assets on the cheap can bring greater benefits and fewer welfare losses than widely thought, a new study suggests.

by Henri Servaes and Jean-Marie Meier

On the January 25 this year, the fashion retailer Boohoo agreed to pay £55m to acquire the brand and online operations of collapsed rival Debenhams in a cut-price deal.

Society typically assumes that fire sales - i.e. the sale of assets at a very low price, often when an organisation is struggling - destroy value. However, when we studied the acquisitions made by more than 21,000 companies over more than 30 years and examined the dynamics behind fire sales, we found they have a brighter side, with benefits to society and fewer welfare costs than is widely understood. 

Moreover, during a recession the effects can be particularly pronounced. Our findings are relevant to business owners, policy makers and anyone considering a merger or acquisition. 

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