I’ve been following Liquidity Services, Inc. (LQDT) for about a year now, but the company recently caught my eye when their stock price ran up after announcing an acquisition.  It’s unusual to see the acquiring company’s stock increase 20%+!

Liquidity Services is trying to become the Industry in the Cloud (IC) provider for the surplus assets industry, meaning returns, surplus inventory, government surplus, used capital assets, etc.  The idea is simple and has been around for a long time.  Think about the company as the b2b equivalent of eBay. The sellers are selling used equipment, surplus items, merchandise returns etc. to industrial buyers (equipment dealers) or discounters, flea market providers, and exporters.  LQDT integrates into the mix necessary logistical and financial services.  Come to think about it, it’s more like an Alibaba for used stuff.

LQDT has the challenge that returns, surplus, and used equipment can be in almost any retail and/or industrial category.  As a result, there is not just one industry to be covered, there are many. For example if WalMart has a lot of excess room fans, LQDT needs buyers for room fans to make money; a generic “buyer” not interested in room fans is of no value.  Similarly, if the government has extra armored personnel carriers (a crazy example), LQDT needs access and knowledge of who is in the market for armored personnel carriers (Libyan rebels)?

The point is that total gross merchandise volume is of interest, but what really matters is category-by-category liquidity.  For all the return items that retailers sell them, they need consumers and flea market providers or exporters who want that stuff.  For government and industrial equipment, they need dealers who want that specific kind of industrial equipment–some of which is cross industry (e.g., forklifts), but some of which is industry specific.) It’s a series of industries in reality.  LQDT tries to address this issue by having multiple marketplaces to attract buyers and suppliers of each category of assets.  Otherwise it looks like many of the other ICs I have described in other industries.

LQDT’s acquisition of Jacobs Trading (Irwin Jacobs’s eponymous firm) apparently gave LQDT a stronger relationship with WalMart and therefore greatly increased their liquidity in the consumer end of the market.  The stock market must really have liked the story of how the Jacobs acquisition would help LQDT build the consumer part of their business.

There remain many providers in the consumer space (e.g., Gordon Brothers), but I am a bit more familiar with the industrial world, where there are also quite a few players.  In the industrial world, Ritchie Brothers (RBA) is the most obvious, but there is also Go Industry Dove Bid (public in the UK), Asset Nation, and many more in used telecom and computer equipment.  If LQDT can build the liquidity in the right categories, add the right set of value-added services (logistics, escrow, inspection, price information, seller information) and leverage the web to do so, it would appear to have some running room.  And if the stock moves up every time they buy something, they’ll be a natural industry consolidator! 😉

P.S., I’m wondering if a product does not sell well at WalMart where does it goes to “die”?  Does it go to Big Lots, then to a flea market, then to eBay, then to Bangkok, then to…?  It would be fun to RFID tag the “Sham-Wow” like they tag animals on National Geographic and follow its trip around the world.

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