What is a Divestiture?
Divestiture or divestment is the disposal of company assets or a business unit through sale, exchange, closure or bankruptcy. A partial or full disposal can happen, depending on the reason why management opted to sell or liquidate its business’s resources. Examples of divestiture include, selling intellectual property rights, company acquisitions or mergers, and court-ordered divestments.
What are the Reasons or Motives Behind Divestiture?
- Redundant business units – most companies decide to sell off a part of their core operations if they are not performing in order to place more focus on the units that are performing well and are profitable.
- Generate funds- selling a business unit for cash is a source of income without a binding financial obligation.
- Increase resale value – the sum of a company’s individual asset liquidation value exceeds that of the market value of combined assets, meaning there is more gain realized in liquidation than there is in retaining the existing assets.
- Business survival or stability – sometimes companies face financial difficulties; therefore, instead of closing down or declaring bankruptcy, selling a business unit will provide a solution.
- Regulatory agency interference – a court order requires the sale of a business to improve market competition.
How are Divestitures Carried Out?
Companies divest in order to efficiently manage their asset portfolio. There are multiple options to go about the process.
- Partial sell-offs – selling a business subsidiary to another company to raise capital and apply the funds in more productive core units instead.
- Spin-off demerger – a business strategy wherein a company’s division or unit is separated and made into an independent company.
- Split-up demerger – when a company splits-up into one or more independent companies, and consequently, the parent company is dissolved or ceases to exist.
- Equity carve-out – a corporate approach wherein the company sells a portion of a wholly owned subsidiary through initial public offerings or IPOs and still retains full management and control.