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Pig in a poke

Pig in a Poke

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Definition & Summary: Disguising a toxic asset as a valuable opportunity and selling it off before its true nature is revealed . In essence, you package the liability attractively (through marketing or slight modifications) and find a buyer to take it off your hands, shifting the risk to them.

Detailed Explanation: The phrase comes from a trick: selling a bag purportedly containing a valuable pig, but actually containing a worthless cat. In business, the idea is to hype or misrepresent a declining or problematic business unit such that someone else believes they can profit from it, and they buy it. The purpose: exit a doomed endeavor with a profit (or minimal loss), offloading future collapse risk to the buyer . Key principles: create a narrative of future potential (hope + some urgency) around the asset. Often timing is key -- you do this fast, before the market fully realizes the decline. It may involve some cosmetic fixes or a period of pumping up metrics (like driving short-term revenue growth) to make the asset look healthier than it is.

Real-World Examples:

  • Historical: AOL-Time Warner merger (2000) -- some characterize AOL's role as a "pig in a poke." The dot-com boom hyped AOL's value (leveraging its subscriber base and inflated ad potential). AOL merged with Time Warner, effectively using its overvalued stock to buy a real media company. When the dot-com bubble burst, it became clear AOL's business was a declining dial-up service -- a liability. AOL had sold at peak hype before that was fully evident. Time Warner essentially bought a "pig in a poke" -- they got a cat (dwindling ISP) in the sack instead of the bright new media future promised.

  • Finance: Toxic mortgage securities 2007-2008 -- Banks bundled high-risk mortgages into complex securities (CDOs) that were rated too optimistically (the "poke" presented as AAA pigs). Investors bought them unaware how toxic the underlying loans (the cats) were. The banks dumped these before the housing crash -- a literal pig in a poke scenario that led to the crisis once the truth emerged.

  • Hypothetical: A software firm has a product with plummeting market share. Instead of killing it, they rebrand and slightly modify it to target a niche (creating buzz that it's now tailored for e.g. healthcare). They highlight a few new pilot customers in marketing. They then sell this product line to an unsuspecting smaller company eager to enter healthcare software. That company pays, thinking they acquired a ready-made solution with customers. In reality, the product is outdated and those pilots are shaky. The firm pulled a pig in a poke -- offloading the soon-to-be-dead product under the guise of an "opportunity."

When to Use / When to Avoid:

  • Use when: You're fairly certain an asset is going to collapse or become worthless and you see a window to sell while optimism (or ignorance) is still high . Especially useful if the broader market is in a bubble or if a particular buyer is eager for what you have (but doesn't fully grasp the downsides). It's a last-resort extraction of value. Use with caution ethically, but strategically it's an option when disposal by honest means isn't feasible (no one would buy it if they knew).

  • Avoid when: If discovered, it will destroy your reputation or invite lawsuits. Also, if the asset's issues are too obvious to hide -- a failed attempt could leave you worse off (stuck with the asset plus known dishonesty). If you have ongoing relationship with the buyer or industry, the long-term cost might outweigh the one-time gain. Essentially, avoid if you can't stomach the moral/legal hazard or if word getting out would burn future business bridges.

Common Pitfalls:

  • Moral and legal hazard: This is borderline fraudulent if you actively mislead. If evidence shows you knew it was toxic and sold it as healthy, you could face legal action later (investors suing post-acquisition, etc.). At minimum, industry players will distrust you.

  • Requires a buyer who's less informed: If the potential buyers do thorough due diligence, they might catch on. A failed sale attempt might signal to the market that something's wrong, accelerating the asset's decline.

  • Backfire if you remain tied: Sometimes sellers retain a minority stake or performance-based payments. If the asset fails quickly, you might not get all the payment or might still suffer collateral damage (like indemnities or performance clauses).

Related Strategies: Sweat & Dump (less deceitful cousin -- there you pass it off but the buyer knows it's to be sweated), Misdirection (pig in a poke is a form of misdirection in business deals), Ambush (not directly related, but both involve surprise moves -- pig in poke surprises the buyer post-sale).

Further Reading & References:

  • Wardley Maps Forum -- "Pig in a poke: create hopes and pressure then sell before rational thinking kicks in." . Describes how clever marketing and urgency can make rational thought difficult for the buyer, enabling the sale of something essentially worthless.

  • Classic usage of term in business: articles on "pump and dump" schemes in stock markets -- a similar concept but for securities (inflate perception, then sell off). While illegal in stocks, in M&A it's murkier but conceptually similar.

  • Cautionary tales: Yahoo buying Broadcast.com (1999) for $5.7B -- some argue Mark Cuban sold at peak hype a service that quickly became obsolete (he effectively executed a pig in a poke, walking away a billionaire; Yahoo shut it down within a few years). Cuban's sale is often cited as brilliant timing.