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

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

Corporate Financial Strategy 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 the theoretical financial impact on an over-geared company of raising new equity. 3

Corporate Financial Strategy Financial strategy for a declining company 4 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 Declining and increasing in volatility

Corporate Financial Strategy 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 5

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