Companies, like people, do not live forever. A company’s longterm objective is to maximize *lifetime* shareholder value. Many times this may mean making long term investments in infrastructure that might not pay off in the next quarter’s earnings. But sometimes this means recognizing that the business cannot survive much longer, milking the business and eventually shutting it down.
When a company starts to lose steam, there are three options:
- Continue business as usual
- Spin off and sell undesirable business units (up to and including the entire business) and refocus on more profitable adjacent areas
- Take extreme cost cutting measures to eke out any remaining profits, then shut down and sell assets
But how can you tell which option is best? Here are a few questions to ask:
- Has the market evolved beyond the company’s core competence?
- Are there independent, non-essential pieces of the business that account for a large fraction of losses? (An obvious question, but cannot be reiterated too often.)
- How fierce is the competition, and will there be new rivals emerging over the next 5 years?
- Does anyone want the business (or pieces of it) and why?