I was reading a newspaper article in the FT where a journalist wrote "shareholders wiped out in restructuring deal". As a novice I'm struggling to conceptualize what "wiped out" means, I tried searching Google but still couldn't really grasp it.
When someone says "shareholders wiped out" what do they actually mean?? And in this specific situation how can a restructuring deal cause a wipe out??
link to article: https://www.ft.com/content/ce42bcb7-d9ee-4667-910a-b6c7a419449b
It means that the company is effectively bankrupt, so its existing shares are now worthless. The restructuring will cancel those shares and create new ones that belong to the company’s debtors rather than the previous shareholders. It has happened because the company is unable to pay its debts, and in that situation the shareholders lose their investment and all available assets are used to pay off the creditors, in this case by giving them the new shares in the company.
If the assets of a corporation are valued at more than the debt, the company can sell those assets to raise money to pay off the creditors and/or transfer the assets to the creditors to fulfill the debt. Whatever money is left over when debt is subtracted from the value of the assets is how much value the shareholders get to keep, either as shares in the corporation, or a payout.
If the value of the assets is less than the debt, the corporation defaults on the debt, the creditors take ownership of the corporation (and take the difference between the debt and the value of the assets as a loss), and the previous shareholders are left with nothing.
“Shares” are fractions of ownership.
A company is worth something when it’s assets have more value than it’s debts. (This is known as having a positive net worth.)
When a company has a negative net worth and sales are too low to cover expenses, then the company must go bankrupt.
The most “severe” form of bankruptcy is liquidation, where all of the assets are sold to pay the debtors a fraction of what they are owed. The owners of the company (aka shareholders, since shares are a fraction of ownership) lose their ownership rights to the company.
Thus, they are “wiped out”. This can be a mild inconvenience, it can be a Big Deal, leading to divorce, unlife, or anything in between.
It means that the shares in the company are now worthless, so the shareholders' investment in that company is a total loss. If your life savings were wholly invested in that company, then you really would be financially wiped out.
This can happen as a result of a restructuring because the company owed more money than it was worth. The company can continue to operate, but can end up being fully owned by the people it owed money to, or by a new group of investors, in which case the old stock is worthless.
This system actually protects stockholders. You can own stock in a company that could never pay off its debts, but the creditors can't come after you personally as part-owner and make you help pay. Your only financial risk is the money you put into the stocks.
"Wiped out" is the final consequence of a particular sequence of steps:
The creditors take out the company assets;
This leaves the company with liabilities (taxes, fixed costs) and no assets;
The company is bankrupt, it goes into liquidation and exists no more;
Shareholders are paid last, but there is nothing to be paid to shareholders;
The shareholders are wiped out of their investment/capital/whatever.
You may be confused with 'restructuring deal" meaning the original company may continue. No. This is a general term meaning any change in company structure, voluntary or not, terminal or not.
Some restructuring processes may leave the company assets intact, others may create various separated companies, some will wipe out the original shareholders.
