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CEOs have good reason to be wary of killing off businesses that still produce cash. Even if the business is declining, it’s hard to swallow short-term losses. Just look at Lexmark, which Reuters reported today is exiting the inkjet printing business. Management saw that there was no point continuing to invest in a business that doesn’t have much of a future — even though it accounts for 21 per cent of its revenue — and stocks rallied on the news.
Reuters quoted Wells Fargo analyst Maynard Um, who says this is a great move for the company:
Lexmark’s “rip the band-aid off” approach, while creating greater near-term revenue headwinds than a more gradual wind down, should result in a cleaner slate sooner from which to grow.
A research report from Brean Murray Carret & Co. says that restructuring charges in excess of $100 million and significant sales losses will mean lower near-term earnings. But the move will allow Lexmark to invest in areas like software and imaging, where it actually has room to grow.
It’s accepting the sunk costs and moving on. After all, Lexmark likely would have had to shut down this division eventually, but by doing it early and quickly, it’s building momentum that will make it a stronger, more nimble competitor in the future. Companies like Blockbuster would have been smart to take this approach — or at least some version of it.
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