Corporate Financial Strategy
4th 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 the 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