If
a) a company/stock has just cash (because it has sold it’s business), and
b) is then looking to buy another business with that cash, and
c) the market cap is LOWER than the cash
Is that halal to buy.
It’s not an SPAC but a similar situation I think…
Even if such a stock was halal, I personally would not buy it, because management can be too confident in their ability to turn the company around and spend all the cash on failed projects, until they reach a point of negative net cash, or even negative tangible book value. At that point, even if the company gets liquidated, shareholders get nothing because all the proceeds from liquidation go to creditors, and nothing is left to shareholders.
Having said that, please don’t trust a word I say, because I am not qualified to give financial or investing advice. So, take what I say with big grain of salt.
Let’s say, for instance, that management owned 70% of that stock.
And it was valued at $100m but the cash on the books was £500m.
Personally I’d buy that stock. Why? Because I think there is a high chance that $500m gets paid out in dividends.
If you would still prefer to buy some other stock, that’s obviously ok everyone is different. Am not suggesting in any way that you should buy anything.
I’m just trying to illustrate one example of such a scenario where personally I would buy a stock with that fact pattern.
In theory, distributing that cash among the shareholders is the most rational thing to do, but are people rational? Are managers rational? Many managers avoid liquidation at all costs. Why? To save face. Their ego is too big to allow them to admit that they cannot manage that money effectively.
I’m not giving advice either. I’m just sharing what I would do if I faced such a situation. I’m not qualified to give financial or investing advice.
People/managers generally act in their own interest. Not always, but generally they do.
Exactly. That’s why Warren Buffett recommends to invest in great businesses, with simple models, that even fools could run successfully!