Hi can someone give me a case approach for disinvestment ? i.e should i sell this hotel or not ?
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Hi Abhilash!
Assume you are asked whether disinvesting (aka shutting down) a particular line of business makes sense.
There are a couple of different angles you might want to consider here:
- Profits: 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 (one by one (in order of priority according to your hypothesis or following guidance by the interviewer).
Hope this is helpful - let me know if you want to discuss deeper.
Cheers, Sidi
(edited)
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Hello!
On top of the great responses below, I would add a couple of considerations:
- Why would you indeed disinvest? Having the root cause of why the client is considering this may change the problem completly (e.g., is it not profitable, is it creating "qualitative problems" -such as social or political issues-, etc.
- What is the opportunity cost? I.e., what would be doing with this money/capacity if we indeed disinvested?
Hope it helps!
Cheers,
Clara
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Hello,
The right approach depends on the landscape situation, but generally speaking you have to consider both qualitative (e.g. how could you reinvest the money?) and quantitative aspects.
The standard way to do the quantitative analysis is to compare the selling price with the future cashflows (considering also the discount rate).
Feel free to text me if you want to discuss it further.
Best,
Luca
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Hi Abhilash,
you should evaluate both quantitative and qualitative aspects. Talking about quantitative ones, you should compare the selling price with the present value (obtained by all the expected future profits)
Best,
Antonello
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