Dumping a Dog At a Loss: A Savvy Business Move?

Recently, a growing number of companies have turned to selling off some of their assets to improve their balance sheets and focus more on what they call their “core businesses”. Given the still-uncertain economic climate, these assets are often being sold at a loss. When the business being sold off is a dog, one with low market share in a low-growth market, taking a loss on the sale can be a savvy business move.

Since when is selling assets at a loss considered good business? In certain situations where the business sector is trending downward, it is better to sell at a loss while the asset still holds value. Hedging the bet that the business will rebound with the economy is an risky proposition; not every company will recover to pre-recession levels, especially businesses in boom/bust sectors. It is vitally important to analyze and evaluate the situation on a case-by-case basis. Executives must avoid falling into a recurring cycle of escalating commitment, a process during which they see a project or business failing, then inject more resources and manpower, only to see the business continue to fail, thereby prompting them to add more resources and manpower in hopes that it will eventually succeed. This dangerous cycle has brought about catastrophic failure of both businesses and careers.

To explore a real-life situation that highlights this dilemma, we can examine Yahoo!‘s sale of it’s job search/career advice business, HotJobs. In 2002, Yahoo! purchased HotJobs for approximately $436 million in cash and stock. In 2010, Yahoo! sold HotJobs to Monster for approximately $225 million, a loss on the sale of approximately $211 million. That is a big loss, no matter the size of the company. Yet analysts are still praising the sale as a positive indicator of Yahoo!’s return to the company’s early success. Why?

JP Morgan analyst Imran Kahn believes the move is indicative of Yahoo!’s return to focusing on core businesses of content, display, and search. The terms of the deal also include a multi-year traffic component, meaning Monster will enjoy the benefit of Yahoo!’s expansive reach while Yahoo! will continue to monetize its traffic and maintain the user experience, a vital part of the company’s success. Finally, Kahn believes that the $210 million loss on the sale of HotJobs was a smart move because increased competition from similar sites like Career Builder, Monster, and Dice has been dragging HotJobs down slowly (unique visitors down 32% year over year in December ’09).

This example illustrates the notion that while selling off businesses at a loss can be tough to swallow, it can have a positive impact on the business as a whole in the long run. Divisions in low-growth markets with low market share are not hot commodities to begin with, so when the opportunity arises to make money (albeit at a loss) on the sale of a business, it is a smart move to close a deal with as favorable terms as possible, as soon as possible. From there, businesses can better focus on their mission-critical activities and grow their company through those divisions.

*Information from Imran Kahn originally appeared in a Silicon Alley Insider article by Nicholas Carlson.

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About Michael Dossett

Inactive since Sept. 2011

Posted on March 27, 2010, in Uncategorized and tagged , , , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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