Business Development: Analysis Shed New Insight – then a Business
Challenge: Extract value from an unprofitable, declining business and improve the customers’ value proposition at the same time.
The world is a four-dimensional place (the best-known three plus the element of time). What filled a strategic directive yesterday may be needlessly sucking up critical assets today.
In the mid-1980s, Showtime Networks (SNI) set up a retail distribution business focused on servicing the underserved rural market by leveraging the established C-band satellite technology. The rub was that SNI couldn’t just sell its product. It had to provide a complete television channel lineup. Did it make sense to do this? Absolutely, for if SNI didn’t bring their service to this community no one would, HBO’s similar service certainly was not an option.
As you know, in the late 1990s, DBS came on the scene. With its better picture quality, less visually intrusive dishes, and overall lower equipment cost, it rapidly started to overtake the C-band market. It was time to re-examine this strategic business unit.
My task, conduct the business analysis and propose a solution.
Action: Reviewing the accounting statements showed that the business generated a positive gross margin from day one. Still, one had to question putting the committed level of support assets behind the operation, especially when the financial weight of this burden caused overall profitability to be negative.
Developed the market study and pro-forma financial model that supported the asset divestiture decision. Used Discounted Cash Flow (DCF) analysis to clarify existing market potential and unit’s true bottom line contribution. The result of my strategic review indicated that:
- Most existing retail customers were videophiles with expensive in-home theater systems and would eventually switch to DBS packages
- Home theater equipment retailers install and service both C-band and DBS equipment
- Home theater equipment retailers were consolidating and would pay good money for customers
- Selling the business (list) with a guaranteed SNI content sales figure and eliminating existing support costs dropped more to the bottom-line
- Able to reallocate freed asset to the core business
Solution:
- Developed a pro forma financial model to support the asset divestiture decision. Used Discounted Cash Flow (DCF) analysis to clarify existing market potential and the unit’s true bottom-line contribution.
- Negotiated a bilateral asset sale and marketing partnership. Develop a “win-win” purchase structure that allowed both concerns to derive significant value.
- Provided transition planning and support to ensure continuity of service from a consumer perspective.
Result: $54 million of value creation
We locked in a contractually guaranteed 5-year revenue stream, which fell directly to the bottom line and generated $19 million in cost savings. Customers gained a smooth upgrade path and enhanced support.
By developing innovative analyses and shedding new insights, a better way came to light. This actionable information enabled the organization to profit from a declining business.