Answer to Question #310970 in Finance for Ames

Question

GoGo Airline's parent company is planning to take a cautious approach in launching MegaSaver. In response to the concerns raised by several shareholders, the parent company is exploring the possibilities of dividing its airline business into two distinct departments and monitoring the working capital of the new airline to prevent any liquidity crises.

The parent company has requested that you prepare a report which can enable it to make an informed decision. You are required to include the following information in the report:

· Critical evaluation of the advantages and disadvantages of divisionalisation to the parent company

· Explanation of various techniques the parent company can use to measure the performance of the proposed divisions and divisional managers

Answer 1

When evaluating the "pluses" and "minuses" of an event, a comparison is usually made with an alternative method of reorganization - spin-off.

So, in comparison with the allocation, the advantages of separation can be:

the ability to start from a “clean slate” for each company created - for example, get rid of a negative reputation in the market, change the name or address of the company;

equal market opportunities for each newly created ownership group in the event of separation due to conflict.

However, separation also has disadvantages:

a larger amount of work, financial and time costs than when spinning off - you will have to transfer (and even in some cases re-register) much more property, register not one (allocated), but two or more companies at once;

when splitting, all licenses of the “parent” company are lost, each new company will have to receive them again if necessary;

in the event of separation, the positive image earned by the reorganized company, its corporate name, is irretrievably lost.

For evaluation, you can use financial indicators:

• indicators for assessing the property status;
• indicators for assessing financial stability (solvency);
• indicators for assessing the liquidity of assets;
• profitability assessment indicators;
• business activity assessment indicators;
• indicators for evaluating market activity

Or come up with specific indicators such as a production contract: indicators of labor protection and industrial safety, financial indicators, personnel indicators, etc.