Corporate Financial Strategy 4 th edition Dr Ruth

Corporate Financial Strategy 4 th edition Dr Ruth Bender Chapter 10 Declining businesses: a case for euthanasia? Corporate Financial Strategy

Declining businesses: contents § Learning objectives § Financial strategy for a declining company § In a declining company… § Declining company transformation strategies Corporate Financial Strategy 2

Learning objectives 1. Explain how the life cycle model relates to a company in the decline stage of its life. 2. Evaluate a deep discount rights issue. 3. Calculate theoretical financial impact on an over-geared company of raising new equity. Corporate Financial Strategy 3

Financial strategy for a declining company Business risk Low Financial risk High Source of funding Debt Dividend policy Total pay-out ratio Future growth prospects Negative Price/earnings multiple Low Current profitability (eps) Low and declining Share price Corporate Financial Strategy Declining and increasing in volatility 4

In a declining company… § Reduce the cost base to prevent losses § Run the business for cash § Only reinvest if there is a short payback period § Be prepared to close down the business once it stops generating cash Corporate Financial Strategy 5

Declining industry transformation strategies A single company rationalizes the industry by taking over small competitors until it acquires a dominant market share, enabling much greater financial returns High Rate of market growth Low/negative High Corporate Financial Strategy Relative market share 6 Low