Evaluate various exit strategies, such as divestiture of assets.
Handing over to joint venture partner, diversification, or shutting down operation, and contingencies for your global venture.
Make recommendations to the viability of your business plan.© BrainMass Inc. brainmass.com April 3, 2020, 2:48 pm ad1c9bdddf
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1. Evaluate various exit strategies, such as divestiture of assets;
An exit strategy is the method by which a venture capitalist or business owner intends to get out of an investment that he or
she has made in the past. In other words, the exit strategy is a way of "cashing out" an investment. Examples include an initial public offering (IPO) or being bought out by a larger player in the industry. Also referred to as a "harvest strategy" or "liquidity event". In fact, to cope with the new realities, many COMPANIES are pursuing diverging paths of consolidation on
the one hand and divestitures on the other. The simple equation of profit and loss dictates two possible solutions for companies seeking to improve their bottom line: boost revenue or cut costs. With more profits at their disposal, companies are then in a position to either pursue potential possibilities, such as joint venture partner, diversification, AND contingencies for a global venture, OR TO SHUT DOWN BUSINESS all together. In addition, pursuing large-scale acquisitions could also be considered as a way to achieve new growth targets. In fact, it is perhaps no coincidence that mergers and acquisitions (M&A) activity has reached a crest this year (http://www.platts.com/Petrochemicals/Resources/News%20Features/petcheminsight/).
Consolidation or Divestiture Strategies -
Should the company in Saudi Arabia (?) divest company assets in Saudi Arabia? For example, similarly, Saudi Arabian petrochemical giant SABIC bought DSM's petrochemicals business in 2002. This move signaled the exit of DSM from basic polymers as the company diverts its resources to developing its high-value-added specialty and fine chemicals segment. DSM's effort to seek partners for specialty and fine chemicals has already borne fruit with the company entering into a joint venture with China National Offshore Oil Corp to conduct a feasibility study for building a new melamine plant on Hainan Island, China (http://www.platts.com/Petrochemicals/Resources/News%20Features/petcheminsight/). This is one consideration for your joint venture.
Should the company, instead, consolidate assets? Your company could consider the consolidation of assets within the levels of resistance and support within the consolidation are created through the upper and lower bounds of the stock's price. Take Shell for example. Meanwhile, as part of a review by Shell's board of directors, the company held an internal discussion this June on a possible plan to re-merge Shell Chemicals back into its parent company. The company has set up a steering group to look into the possible simplification of its board and group management structures, currently operating under two separate heads?Shell Transport and Trading, and Royal Dutch Shell. Sources close to the company said that re-integration of the chemicals group under one umbrella, if realized, would align with the company's plans to simplify its management structure (http://www.platts.com/Petrochemicals/Resources/News%20Features/petcheminsight/). This is another potential consideration for your company.
In sum, something to consider when using an exit strategy is that it is more difficult for a VC or entrepreneur to get money out of an investment because they are generally dealing with private companies. When a firm is private, the shares cannot be sold nearly as easily as when the firm is publicly traded on a stock exchange. So, even though a private startup firm could be worth millions of dollars, the VC/entrepreneur has little access to this wealth. You can think of the exit strategy as the first opportunity to trade an illiquid asset (shares in a private firm) for a very liquid asset (cash). For example, a trader might set a stop-loss order to exit a trade if a stock drops a certain percentage (http://www.investopedia.com/terms/e/exitstrategy.asp).
NOTE: I am adding all potential possibilities and reasons that your company might consider each, mainly because I have limited (or no) information about the size of your investment and what type of company you have invested in.
2. Handing over to joint venture partner, diversification, or shutting down operation, and contingencies for your global venture.
Each type of strategy has its strengths and weaknesses. In fact, the type of business and the companies needs will, at least in part, determine the strategy, which is right for your fictitious company. If the company aim is to absorb risk, diversification could be a consideration. However, the company must first carefully consider the various risks that are associated with each investment made? It is important to look at the relationship between return and risk. Lets take a look at the two basic types of risk:
· Systematic Risk - A risk that influences a large number of assets. An example is political events. It is virtually impossible to protect yourself against this type of risk.
· Unsystematic Risk - Sometimes referred to as "specific risk". It's risk that affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees.
Diversification is the only way to protect your company from unsystematic risk (see
http://www.investopedia.com/university/risk/risk2.asp for more detail on risk and diversification).
Another potential risk to consider for a joint venture in Saudi Arabia is foreign exchange risk:
· Foreign Exchange Risk - When investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as well. Foreign exchange risk applies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of America and invest in some Canadian stock in Canadian dollars, even if the share value appreciates, you may lose money if the Canadian dollar depreciates in relation to the American dollar (http://www.investopedia.com/university/risk/risk2.asp).
With the stock markets bouncing up and down 5% every week there needs to be a safety net for investors. Diversification is the answer. Diversifying (and most investment professionals agree), while it does not guarantee against a loss, diversification is the most important component to helping some companies reach your long-range financial goals while minimizing risk. But, remember that no matter how much diversification you do, it can never reduce risk down to zero (http://www.investopedia.com/university/risk/risk4.asp).
Does your company want to raise its shareholder value? For example, if the company interested in raising shareholder value, it might consider M&A or joint venture partnership. For example, we need only look at the oil industry to consider potential possibilities. For example, despite a wave of consolidations in the early 1980s, the petrochemical industry is far from exhausting the benefits of mergers and acquisitions. The current run-up in crude prices since the end of 2002 has coincided with greater profits for the larger integrated producers, affording them greater power to pursue acquisitions that may have been shelved in the early 1990s. Indeed, a recent spate of deals by producers around the world attests to the appeal of M&As for raising shareholder value (http://www.platts.com/Petrochemicals/Resources/News%20Features/petcheminsight/).
Joint venture (JV) is a consideration if the company has the cooperation of two or more individuals or businesses--each agreeing to share profit, loss and control--in a specific enterprise. This is a good way for companies to partner without having to merge. JVs are typically taxed as a partnership (http://www.investopedia.com/terms/j/jointventure.asp and thus, it would increase your potential capital.
It seems relatively optimistic about the future for venture capitalists. At the same time, however, some argue, "in the next five years the number of VC firms is going to shrink to 50% of what it is now." (http://www.mccombs.utexas.edu/news/pressreleases/tiecon.asp). The changing economy demands that the company displays greater capital efficiency. After all, Haque said, "You don't see billion-dollar exits anymore." Rather, exit valuations of companies are trending downward. Therefore, the days of hundred-million dollar investments are over: "Unless we can get these companies built for $25-30 million of capital, the business model for venture capital investing is going to fall apart." http://www.mccombs.utexas.edu/news/pressreleases/tiecon.asp).
This may suggest diversification or joint venture options.
3. Make recommendations to the viability of your business plan.
You should now be in an excellent position to make the recommendations as specific as you can to your specific company. What is your company? Other things to consider in your recommendations can be drawn for the following conditions in Saudi Arabia:
Background Notes: Saudi Arabia (Excerpt)
Kingdom of Saudi Arabia
Area: 1,960,582 million sq. km. (784,233 sq. mi.), slightly more than one-fifth the size of the continental United States.
Cities (2003 est.): Capital--Riyadh (pop. 3.7 million). Other cities--Jeddah (2.7 million), Makkah, (1.6 million), Dammam/Khobar/Dhahran, (1.6 million).
Terrain: Primarily desert with rugged mountains in the southwest.
Climate: Arid, with great extremes of temperature in the interior; humidity and temperature are both high along the coast.
Nationality: Noun--Saudi(s). Adjective--Saudi Arabian or Saudi.
Population (2004 est.): 26.7 million (19.7 million Saudis, 7 million foreign nationals).
Annual growth rate: 3.1%.
Ethnic groups: Arab (90% of native pop.), Afro-Asian (10% of native pop.).
Language: Arabic (official).
Education: Literacy--male 84.7%, female 77.8%.
Health: Infant mortality rate--48/1,000. Life expectancy--male 67 years, female 71 years.
Work force: 7.0 million (about 35% foreign workers); industry--25%; services (including government)--63%; agriculture--12%.
Type: Monarchy with Council of Ministers and Consultative Council. Unification: September 23, 1932.
Constitution: The Holy Qur'an (Governed according to Islamic Law), Shari'a, and the Basic Law.
Branches: Executive--King (chief of state and head of government). Legislative--a Consultative Council with advisory powers was formed September 1993. Judicial--Supreme Council of Justice, Islamic Courts of First Instance and Appeals.
Administrative divisions: 13 provinces.
Political parties: None.
GDP (2002 est.): $242 billion.
Annual growth rate (2002 est.): 0.6%.
Per capita GDP (2002 est.): $10,560.
Natural resources: Hydrocarbons, gold, uranium, bauxite, coal, iron, phosphate, tungsten, zinc, silver, copper.
Agriculture: Products--dates, grains, livestock, vegetables. Arable land--1.72%.
Industry: Types--petroleum, petrochemicals, cement, fertilizer, light industry.
Trade (2001 est.): ...
For a business in Saudi Arabia, this solution evaluates various exit strategies, such as divestiture of assets. Other strategies evaluated include handing over to joint venture partner, diversification, or shutting down operation, and contingencies for a global venture. Information about Saudi Arabia is detailed, such as culture, economic and political status, in relation to making recommendations to the viability of the proposed business plan.