Question

Briefly discuss the importance and use of EACH of the following topics (a,b,c,d) using your own opinions and examples.

Alternative Exit and Restructuring Strategies. (300 Words)

a. Joint Ventures

b. Divestitures

c. Spin-offs

d. Split-ups

Answer 1

A) JOINT VENTURES:

A joint venture is a common way of combining resources and expertise of two otherwise unrelated companies. There are many benefits to this type of partnership, but it is not without risks - arrangements of this sort can be highly complex.

Benefits of joint ventures:

• access to new markets and distribution networks
• increased capacity
• sharing of risks and costs (ie liability) with a partner
• access to new knowledge and expertise, including specialised staff
• Joint ventures are especially popular with businesses operating in different countries, eg within the transport and travel industries

B) DIVESTITURES:

Divesting is amongst the most difficult business decisions when operating a multi-divisions company. However, there are benefits to divesting such as protecting against bankruptcy, hedging against profit losses, and preventing political and legal issues. Subsequently, divestiture leads to a company's financial stability and growth. Below are some reasons why companies chose to divest rather than trying to push through and possibly fail.

• Obtain capital in order to scale the primary business unit. This reason prevents from an overall liquidation or bankruptcy. Rather than pouring capital into underperforming units, selling these units enables a company to reinvest in its core division.
• Concentrate on core business areas. Overtime, some companies acquire smaller businesses that have no association with any of their core divisions. This disconnect hurts the bottom line, therefore carving out unrelated business units would recoup the loss of profit.
• Pursue of better opportunities. Divestiture permits a company to gain financial resources needed for compelling investment opportunities – strengthening core business areas and higher ROI.

To conclude Divesting business units matters because it helps a company reduce debt, enhance shareholder value, regain profit, and reorganize a company back to focusing on its strength.

C) SPIN OFF:

A spin-off occurs when a company takes a division or piece of its business and creates an entirely new entity. You can sell a spin-off and receive the benefits in one lump sum or retain control in the company and reap the benefits and the expenses.

Spin-offs come in two forms: voluntary and involuntary. Voluntary spin-offs typically yield benefits to the stockholders of the parent company, because companies tend to spin off successful subsidiaries that are not core companies and thus not essential to the parent companies. Corporation may have a number of reasons for spinning off subsidiaries such as to improve the value of a subsidiary or to take advantage of tax benefits as discussed below. On the other hand, involuntary spin-offs generally result from complaints by federal and state regulatory agencies.

More important, spin-offs have a critical strategic advantage. They provide an opportunity to define—typically, for the very first time—a compelling investment thesis for the business in question and to set the new company up for success as an independent entity. And when the spin-off represents a substantial portion of the initiating company’s assets, it also offers an opportunity to refocus the investment thesis and value creation strategy of the businesses that remain behind.

D) SPLIT UP:

A split-up is a financial term describing a corporate action in which a single company splits into two or more independent, separately-run companies. Upon completion of such events, shares of the original company may be exchanged for shares in one of the new entities at the discretion of shareholders

Split-ups are mainly executed either because a company seeks to slug out different business lines in an effort to maximize efficiency and profitability, or because the government forces this action in an effort to combat monopolistic practices