Hi all! I am currently trying to build a customized framework for post-M&A scenarios. Specifically, I am wondering which are the elements to think about when deciding about continuation or discontinuation of certain business lines. What are the core "tests" to check whether closing or selling off a line of business makes sense?
Discontinuing a line of business after acquisition?
To your question of "core tests", I think there are 2 core tests for considering whether to shut down a business line, post M&A:
- Strategic alignment: Does the business line align with the thesis of the M&A?
- ROI / resource allocation vs other businesses: Are there better business opportunities to pursue with the resources allocated to the business line (to Sidi's points on profit / profitability above).
Note: There are also other considerations like legal issues, HR issues, competitor response etc. But I think the above are the 2 table-stakes strategy questions that must be asked in every case.
1. Strategic alignment:
I remember working on a private equity M&A deal where the thesis was to consolidate a whole lot of small dental practices into a national chain, so there can be greater ROI from scale on investments like branding, marketing & sales, IT. The ultimate aim was to get enough scale for an IPO.
Some of these dental practices had supplementary businesses like partnerships with local GPs, optometrists, dental goods suppliers. These businesses were very profitable, but it did not align with the M&A's thesis, and would not have a place in the final national chain. Hence, the decision was to sell these business interests.
2. Resource Allocation vs Other Businesses:
Whenever you have a portfolio of business lines or opportunities to pursue - capital and resource allocation is always a critical question.
The considerations here are about profitability (per Sidi's point) -
- What is the ROI of the business: expected revenue (considering market size, competition etc) + expected investments required
- What is the timing of returns on the business: is this a business where you have to invest deeply and not expect profits for a long time, or is it a cash cow business that is spinning out immediate cash flows
- Also importantly, what other opportunities are you comparing this to: given the investments required, what other opportunities are you giving up by choosing to invest here?
Answering the above 3 questions will then give you a sense of whether you making the best ROI choice in investing or discontinuing the business line.
Once you address the Strategic Alignment + Resource Allocations questions above, that should help you decide what to do. After that, you can decide how to do it (sell off, spin out, discontinue completely, reduce investment, find joint ventures etc)
Hope that is helpful!
there are a couple of different angles you might want to consider when thinking about potential discontinuation:
- Profits: as you wrote, you should first check whether the business line generates profits, and what the outlook to the future is (will it generate profits going forward?).
- Profitability: Not to be consfused with profits - how much profit is generated relative to resources spent (i.e., profits over cost)? Thereby, you check whether there are better options for utilizing resources (e.g., other lines of business that could be expanded)
- Cannibalization: Even if profits and profitablity look good, cannibalization could eat into other areas of business. So this should also be checked.
- Natural ownership: there might be other companies that, due to their particular asset base or footprint, can extract more value out of your business line. In that case it might be worthwhile to sell off this particular line of business for a price that exceeds expected profits over your target time horizon.
All of these aspects should be succinctly outlined and then assessed (either all of them one by one (in order of priority according to your hypothesis), or following guidance by the interviewer).
When your diagnostic shows that getting rid the focal business line makes sense, then you also need to think about how you want to do this! In principle, you have the following possibilities:
- Shut it down and utilize assets for other lines of business (if possible)
- Sell off assets and shut down
- Sell off in its entirety
1. and 2. make sense if cannibailization is a major issue. If there is no cannibalization, then 3. might be the best option (if a potential buyer can be found who is better positioned to turn around this business line).
Hope this helps. Let me know if you want to discuss in more depth.
the steps would be similar to those done for an actual acquisition. Specifically:
- Clarify the goal – what does the company want to reach with those business lines (profits is the most common goal, but there may be others – eg revenues)?
- Identify the market evolution for the business lines that could be sold – this will help to understand which will be their future evolution
- Identify it is feasible for the business lines considered to reach the goal identified in step 1. In doing so, you should also consider synergies and cannibalization
- Even if the business lines help to reach the goal, verify if it is possible to sell them and gain more of the variable that you want to optimize as for step 1 – eg profits. This would also involve considering the opportunity cost of concentrating on those business line compared to others.
- If needed, consider the best way to sell the business lines and risks involved
Hope this helps,
I would start a bit more high-level here. Before I come to shut down the business line I would try to analyze the business:
1) Analyze the business and fix it:
- Revenue / cost problem
- Revenue -> Market / market share problem
- Costs -> Fixed / variable
2) Analyze the additional opportunities if can't fix the problem:
- Adjusting current product / improving the value proposition
- Entering the new markets
- Entering the new segments (geographical, customer, etc)
- Building new capabilities (Distribution, supply, assets, knowledge, etc)
3) How to shut down the business if needed?
- Costs and benefits of shut down
- Time to shut down
- The exit value of the business / Fair value of assets
- Key capabilities to maintain (Distribution, supply, assets, knowledge, etc)
Opportunity costs are an economic concept to quantify benefits of (discarded) alternatives. They measure the lost benefits that occur if you choose the best alternative instead of the second best one.
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