Despite the fact that the noun warehousing is derived from the root word “warehouse,” the addition of the suffix “-ing” gives it a new meaning. This is not to say that they are completely unrelated, quite the contrary, but they remain distinct concepts with particular implications.
The confusion mainly arises when the word is used in the context of the stock market, wherein warehousing refers to a very specific buying behavior. You can find all the details and solve the mystery below.
Warehouse vs Warehousing
In the most straightforward way possible, a warehouse is a physical building that has the purpose to store large amounts of merchandise. In business operations, warehouses fulfill a crucial role for retailers, enabling them to run their business in a more controlled fashion.
With this in mind, the kernel denotation of warehousing is the act of storing goods. Although not as common as the former, the word was used with precisely this meaning as early as 1864. As you may know, warehousing in logistics serves several important functions for businesses, including having enough inventory available when needed, helping the stabilization of prices, and much more.
In finance, however, warehousing refers to an entirely different thing, despite the fact that the initial meaning of storing something piecemeal for a long period of time is still somewhat preserved.
A lesser known usage of warehousing as a word is in the field of finance, where it refers to a buyer behavior that is best described as the willful accumulation of shares in an organization with the purpose of acquiring it at one point or another.
Let’s take a look at an example to see why and how warehousing is done. Let’s assume that a hedge fund by the name of Digital Coinz wants to become a controlling party in an up-and-coming automotive manufacturer that is listed on the stock market, Organic Cars. The latter, however, is perceived incredibly well by the market, an opinion which may or may not be founded.
Because of their reputation, Organic’s valuation is through the roof. This makes a tender offer to them highly unfeasible from the point of view of Digital Coinz, as they believe that, over a period of several years, the net worth of Organic will consistently drop until it reaches a more feasible number.
Instead of making them an offer right now, Digital starts the process of warehousing Organic shares. They have instructed their agents to buy Organic stock piecemeal, over a period of 6 to 18 months, without selling any of them.
It is a common practice to have the brokers buy when the shares are on sale, i.e. when another party wants to give them out at a lower rate than the market average. It might take longer to accomplish than a straightforward acquisition, but it is less risky and more likely to generate value for the capital owners over longer periods of time.
Another reason why brokers and funds proceed with warehousing on a daily basis is that buying too much stock at a time can trigger a backlash from the market, which can send the share price further down than it was to begin with.
Sometimes, companies don’t necessarily want to reveal their intentions to the market, so they’ll proceed with warehousing up until they reach just under the 5% ownership threshold. The reason for this is that the U.S. Securities and Exchange Commission requires any party who has a controlling interest of 5% or more in a company to file an official form with the authority. The latter will basically reveal Digital’s intentions in what concerns Organic to the entire market.
More Warehousing than Warehouses
Because of their interrelatedness, people often confuse warehousing functions or processes with the idea of a warehouse. Sure, the latter basically enables companies to do a host of things, but we should not forget that the word refers to the building and nothing more.
For the sake of clarity, whether in logistics or in the finance sector, we need to use the right term so as to not mislead any parties by chance.