A divestiture takes place when a company sells an asset such as a service, piece of property, or product line. Divestitures
Divestment
In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.
What is divestiture in business?
A divestiture (or divestment) is the disposal of company's assets or a business unit through a 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’ resources. Examples of divestitures include selling intellectual
What is divestiture and spin-off?
In a spin-off, the business entity subdivides into multiple subsidiaries, but the parent company persists in its operations. Let us understand divestiture through an example. Assume that a Swiss Corporation operates in three business divisions,’ namely clothing, automobile, and real estate.
What are the benefits of divestiture?
The divestiture allows companies to cut down their cost and expenses, repays their debt, smoothen business operations, and provides them sufficient funds to reinvest into other ventures. It improves the share value of the company’s stock.
Why do companies decide to do divestments?
The specific regulations around a certain industry or product category may mean that the company decides that a divestiture is the best decision. This can be seen where an industry is placed in a higher tax band, or becomes a ‘strategic (read: protected) national industry’, changing its value for the parent company.
How do you do a divestiture?
Steps in the Divestiture ProcessMonitoring the Portfolio. For a company that pursues an active divestiture strategy, management regularly performs a review of each business unit and its relevance to the company's long-term business strategy.Identifying a Buyer. ... Performing the Divestiture. ... Managing the Transition.
What are the four 4 types of divestitures?
As the strategic planning continues, and based on the review of the above data and the company's objectives, the seller will next need to determine the appropriate type of divestiture (carve-out, spin-off, or a trade sale).
What are the 3 kinds of divestitures?
There are three basic types of divestitures: sell-offs, spin-offs and split-ups.
What is an example of divestiture?
Examples of divestitures include selling intellectual property rights, corporate acquisitions and mergers, and court-ordered divestments.
What are the advantages and disadvantages of divestiture?
Divesting assets with poor profitability frees up internal assets, which the company can use to strengthen its other businesses. It also provides cash to purchase or improve assets that can enhance profitability. One potential disadvantage of a divestiture is the negative impact on a company's cost structure.
What happens to employees in a divestiture?
Employees will generally be transferred through an offer/accept process, unless sufficient assets are transferred to meet local requirements for an automatic transfer of employees. Moreover, in an asset transaction, HR plans, programs and IT systems may not transfer with the business.
What happens when a company divests?
Divestment involves a company selling off a portion of its assets, often to improve company value and obtain higher efficiency. Many companies will use divestment to sell off peripheral assets that enable their management teams to regain sharper focus on the core business.
How do you prepare for divestment?
To get divestment-ready, a company – amongst other things – needs to:Conduct strategic analysis of the business unit in-scope for divestment (see Building Sell-side Capabilities);Critically assess the underlying drivers of the potential divestment and understand any possible adverse implications of divesting;More items...•
Which company used divestiture strategy?
Divestment was used during the 1990s to protest the military-ruled government of Myanmar (Burma), when such multinational corporations as PepsiCo, Texaco, Hewlett-Packard, and Federated Department Stores (later Macy's, Inc.).
What are two types of divestitures?
There are three common types of divestitures: sell-offs, demergers, and equity carve-outs.
What is divestiture in simple words?
Definition of divestiture 1 : the act of divesting. 2 : the compulsory transfer of title or disposal of interests (such as stock in a corporation) upon government order.
Why do divestitures happen?
Through divestiture, a company can eliminate redundancies, improve operational efficiency, and reduce costs. Reasons why companies divest part of their business include bankruptcy, restructuring, to raise cash, or reduce debt.
What type of corporation restructuring involves reducing the scope of the firm through divestitures and spin offs?
Contraction is a form of restructuring, which results in a reduction in the size of the firm. It can take place in the form of a spin-off, split-off, divestiture or an equity carve-out.
What is divestiture PDF?
Divestitures are defined as the removal of one or more of a company's lines of business via selloff or spinoff. In this article, we describe how research on divestitures has evolved in the finance and strategy literatures, and we explain how to design and conduct empirical research studies on this topic.
What is restructuring and divestiture?
Divestitures are major corporate restructuring transactions that narrow firm boundaries by removing one or more of a company's businesses, subsidiaries, or divisions.
What is corporate restructuring?
Corporate Restructuring means re-arranging business of a company for increasing its efficiency and profitability. Restructuring is a method of changing the organizational structure in order to achieve the strategic goals of the organization. It involves dramatic changes in an organization.
What Is a Divestiture?
A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a company's core competency .
Why is divestiture important?
As companies grow, they may become involved in too many business lines, so divestiture is the way to stay focused and remain profitable.
What is a divestiture in business?
A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a core competency . A divestiture may also occur if a business unit is deemed to be redundant after a merger ...
How much did Thomas Reuters sell in 2015?
The division booked sales of $1.01 billion in 2015, and 80% of those sales are recurring, making it an attractive investment for the private equity firm. The divestiture represented one-quarter of Thomas Reuters' business in terms of divisions but is not expected to alter the company's overall valuation.
What does it mean to divest assets?
By divesting some of its assets, a company may be able to cut its costs, repay its outstanding debt, reinvest, focus on its core business (es), and streamline its operations. This, in turn, can enhance shareholder value. Large companies experiencing unstable market conditions and competitive pressures may divest part of their business.
When did AT&T get divested?
Divestitures can also come about due to necessity. One of the most famous cases of court-ordered divestiture involves the breakup of the old AT&T in 1982. The U.S. government determined AT&T controlled too large a portion of the nation's telephone service and brought antitrust charges against the company in 1974.
Why do corporations have to divest?
Government regulation may require corporations to divest some of their assets, especially to avoid a monopoly.
What is Divestiture?
Divestiture is a process of shutting down your business units or departments through closure, exchange, bankruptcy, or sale. It usually happens when the management decides to stop the operations of a certain department or unit because it doesn’t serve the company’s core ideology.
What does it mean to divest a company?
In other words, we can say that divestiture means selling a company’s assets so that you could manage its portfolio. When companies and businesses expand their operations, then they come up with several lines and categories that they have to shut down in order to focus on their core profitable business. Many conglomerates usually come up with such issues.
What happens when a government divests a company?
The government also divests her interests and asset to promote the private sector.
Why does the government divest?
The government also divests her interests and asset to promote the private sector. The divestiture allows companies to cut down their cost and expenses, repay their debt, smoothen business operations, and provides them sufficient funds to reinvest into other ventures. It improves the share value of the company’s stock.
Why did WeWork divest?
For instance, WeWork Corporation decided to divest its software and content marketing business, because it was diverting the company from its primary renting and sharing workspace business.
Why did Philips divest NXP?
For instance, Philips divested its semiconductor division NXP in 2006, because it wasn’t generating sufficient profit and hurting the brand’s stock value.
What if the new business units don’t deliver the expected results?
But what if the new business units don’t deliver the expected results, there should be a contingency plan of getting rid of that unit. That’s what divestiture strategy is all about. Today, we’ll discuss divestiture, its types, and reasons with examples;
What is divesting in business?
What is Divesting? Divesting is the act of a company selling off an asset. While divesting may refer to the sale of any asset, it is most commonly used in the context of selling a non-core business unit. Divesting can be seen as the direct opposite of an acquisition. Asset Acquisition An asset acquisition is the purchase ...
What are the costs of a divestiture?
Some of the direct costs of divestitures include the transaction and transition costs associated with the decision. This includes bringing in the people, processes, and tools required to execute the divestiture process, which involves things such as managing the legal transfer of assets, valuing the synergies to the buyer, and deciding on retention and severance policies regarding human resources.
What is divestiture valuation?
The divestiture itself will encompass various aspects of the business such as legal ownership, valuation#N#Valuation Methods When valuing a company as a going concern there are three main valuation methods used: D CF analysis, comparable companies, and precedent transactions#N#and change of management, as well as retention and severance of employees.
Why do companies divest?
In the same way, a firm may choose a divestiture strategy to allocate its resources for optimal use, removing business units that do not generate the required rate of return. But shareholders may mistakenly perceive the divestiture as signaling an urgent need for cash because the company is in trouble. As a result, investors may sell their shares, causing the company’s stock price to fall – further confirming to some investors that the company is in danger of going out of business.
What is the potential damage of reallocating managers' focus onto a separate business unit?
The potential damage is that there is a greater opportunity cost of reallocating the managers’ focus onto a separate business unit when they could be delivering higher performance in their primary area of focus .
Why is it important to diversify?
Divesting enables a company to reallocate resources into their core areas of expertise that ideally generate higher returns on time and effort. One of the issues with diversification within a company is that managerial dis-economies occur. This means that taking on non-core business activities stretches the scope of managers into areas where they may not have the requisite experience, expertise, or time to invest to make the non-core enterprise successful and adequately profitable.
How to avoid investors getting inaccurate signals regarding a company's current position and future prospects?
The way to avoid investors getting inaccurate signals regarding a company’s current position and future prospects is to maintain open communications with stockholders regarding any major corporate decisions, such as the decision to make a divestiture. In such an instance, it is in the company’s best interest to clearly communicate to shareholders the reasoning behind the divestiture decision, along with information regarding the benefits that the company plans to reap from the sale of a business unit.
What is a Divestiture?
A Divestiture occurs when a corporation proceeds with either a partial or an outright sale of a business segment and the assets belonging to the unit.
Divestiture Corporate Strategy
Divestitures in M&A are when a company sells a collection of assets or an entire business division.
Divestiture Process – Seller Benefits
After completing the divestiture, the parent company can reduce costs and shift its focus to its core division, which is a common issue that market-leading companies encounter.
AT&T Divestiture Example
Anti-trust regulatory pressure can result in a forced divestiture, typically related to efforts to prevent the creation of monopolies.
Types of Divestitures
A wide range of different transaction structures could be categorized as divestitures. However, the most common variations of divestitures are the following:
Divestiture vs Carve-Out
Oftentimes, carve-outs are referred to as a “partial IPO” because the process entails the parent company selling a portion of their equity interest within the subsidiary to public investors.
What is a Divestiture?
A divestiture takes place when a company sells an asset such as a service, piece of property, or product line. Divestitures allow companies to generate cash flow, eliminate a business segment (product line or subsidiary) that doesn’t fit their main objective, lower debt, and increase shareholder value.
How to prepare for a divestiture?
Preparing for the sale involves including HR in early conversations to identify key employees and to begin gathering employee-related data and documents. Additionally, if the seller has ever been a buyer, it can turn questionnaires and surveys used in the past in the buyer role on themselves and predict what the potential buyers will ask. Moreover, as the seller cultivates relationships with buyers, it should keep track of all the questions the suitor buyers ask in a FAQ document.
What to consider before divesting?
What to Consider Before You Divest 1 Divestitures can be just as complex as traditional mergers and acquisitions. The moment divesting is considered, company leaders need to clearly communicate their intentions with each other, as well as with Human Resources. The more ahead of the game sellers can get, the smoother the deal and the more control of the narrative they have with employees. 2 Are buyers interested in the asset or the capabilities being divested? Identifying potential buyers who can maximize the capabilities being divested will help drive the price. It should be noted, however, sellers should be weary of divesting to strong competitors if this divestment will hurt the remaining business products/services. 3 What gaps will a buyer of the asset need to fill? What things will the buyer need to have up and running on Day 1? Predicting the answers to these questions will help the sell-side prepare for divestiture and divestiture diligence. 4 What type of divestiture is best for the company’s strategy? For instance, carve-outs perform well when the parent company remains active and maintains a larger ownership percentage, while spin-offs are known for alleviating marketing and management issues as well as boasting tax benefits. 5 Timing, as with many things in business, is key. When companies keep assets that no longer serve them, the assets tend to lose value.
What companies are looking to divest?
Currently, companies such as Aryzta in food, Tata Power in energy and Takeda in pharmaceuticals are looking to divest of non-core assets, readily admitting in each case that the motive behind the divestments is to reduce their debt.
Why do managers divest assets?
This is the most commonly cited reason among managers for divesting of assets, at least in part because it’s the best reason to divest: Essentially, the parent company is moving in a different direction and the asset is no longer a fit with its corporate strategy.
How much was Chrysler divested for in 2008?
This is common in property portfolios with iconic buildings. In 2008, 90% of the New York’s Chrysler building was divested for $800 million - extremely over-valued, even by New York’s inflated prices. But it did allow for a huge value generating divestment for its then owner.
Why do companies divest?
The need to generate additional funds - and avoid the need to sell shareholder equity or issue debt - is a common reason for divesting.
How does Divesting Work?
Divesting is simply a purposeful action that lets a company free up capital invested in certain poorly performing assets or business divisions. Sometimes segments of a firm come under legal pressure or regulation, initiating a divestiture. Subsequently, companies can pour the acquired funds into focused business lines to succeed. Owners often continue to keep such incompetent business units active. Some expect these divisions to perform well in the future; others are unaware of the divestiture process and its advantages. The basic steps involved in divesting are as follows:
Why do companies divest?
A business entity usually divests its assets due to debts, bankruptcy, corporate restructuring, or niche streamlining. Sometimes it is done to reduce operational expenditure or to raise finance. In extreme scenarios, companies divest without wanting to, due to the pressure from regulatory authorities. Under duress, companies give up a division.
What is the process of selling or transferring a significant chunk of business assets, division, investment, or subsidiary due?
Divestiture is the process of selling or transferring a significant chunk of business assets, division, investment, or subsidiary due to financial, political, or social reasons. Divesting can be done in various ways; its three crucial strategies are as follows:
What is the act of selling organizational assets to generate funds urgently?
Divesting refers to the act of partially or entirely selling organizational assets to generate funds urgently. The urgency could be caused by a legal or regulatory compliance issue. It is also referred to as divestiture.
Why do businesses do divestment?
Divesting enables businesses to focus on their core operations. The firm once again focuses on the niche where it holds expertise.
What is liquidation in business?
Liquidation refers to a business shutdown whereby the organization gives away all the assets to the lenders, debenture holders, shareholders, creditors, and other claimants. However, divestitures do not dissolve the organization. They only restructure companies by selling a part of the assets, investment, subsidiary, or division. This is followed by asset allocation and reinvesting.
What is the strategy of selling off some of the business divisions, assets, and investments to acquire funds?
Divestment is nothing but the strategy of selling off some of the business divisions, assets, and investments to acquire funds. In this case, restructuring of the business entity takes place while its functioning is not affected.
How Does Business Divestiture Work?
Maybe your business has a product that's just not bringing in money. Instead of getting rid of it, you throw more money into marketing, trying to find the right customers. But putting more resources into something that clearly isn't working is usually a bad idea.
What is the purpose of divestment?
Divesting is a method that can raise cash, eliminate waste, and streamline a company to perform better in the future. 1 Sometimes divestiture is required as part of a bankruptcy, or it may be ordered by a court as a means of ensuring marketplace competition. 2 . Alternate name: divestment.
How to divest a business after bankruptcy?
Here are some steps to take when you are considering divestiture. Consider assets. Look at the asset side of your company's balance sheet.
What is the most common type of business divestiture?
Selling underperforming assets. This is probably the most common type of business divestiture, and the most common asset to be divested is usually a product or service that isn't performing well. There will always be products or services that do better and some that don't do as well. Getting rid of those that aren't working gives you more time ...
What is the process of liquidating a business?
One type of business bankruptcy is Chapter 7. Chapter 7 bankruptcy is the process of liquidating (selling off) and closing a business. In this, all the assets of the business are sold. Other types of business bankruptcy (Chapter 11 reorganization, for example) may involve liquidation of some assets. Business sale.
Why do businesses divest?
Some of the most common reasons why businesses divest themselves of assets include: Getting cash. A business might sell some property to solve a cash flow problem. For example, a business that needs money might sell or license some equipment or some intellectual property (copyright, trademark, or patent) that it owns.
Should business divestitures be made in desperation?
Business divestiture decisions should not be made in desperation, but rather as part of your ongoing business financial planning process.
What Are The Reasons Behind A Divestiture?
- There are many reasons why a corporation may decide they need to sell an asset, a business unit, or the entire company. Some of the most common reasons include:
Relation to Mergers and Acquisitions
- Divestiture transactions are often lumped in with the mergers and acquisitions process. Most people think of the buy-side of these transactions (buying businesses) but corporations also actively look to sell non-performing or non-core assets to optimize their business. Constantly reviewing a company’s portfolio of assets and optimizing it for the best performance is an impor…
Example: GE Divests GE Capital
- In 2015, parent company GE decided it would divest its GE Capital business as part of a restructuring plan. According to an article by Fortune, investors liked this transaction for three main reasons: 1. Investors don’t like conglomerates (i.e., there is a “diversified discount” applied to their valuation) 2. Earning a return on capital above your cost of capital creates value (a reason t…
Corporate Development and Investment Banking
- The finance professionals most actively involved in carrying out the sale of assets and business units are investment bankers and corporate developmentprofessionals. When analyzing a divestment, analysts in investment banking or corp dev will perform a valuation of the asset using financial modeling and other techniques. To learn more about valuation as it related to M&A, che…
Additional Resources
- To keep learning and advancing your career as a financial analyst, CFI has created a vast library of resources to help you on your way. Additional resources include: 1. Free intro to corporate finance course 2. Free Excel crash course 3. Financial modeling guide 4. The Analyst Trifecta
What Is A Divestiture?
- A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a company's core competency. A divestiture may also occur if a business unit is deemed to be redundant after a merger or acquisition, if the …
Understanding Divestitures
- A divestiture is the disposition or sale of an asset by a company as a way to manage its portfolio of assets. As companies grow, they may find they're in too many lines of business and must close some operational units to focus on more profitable lines. Many conglomeratesface this problem. Companies may also sell off business lines if they are unde...
Divesting Assets
- There are many different reasons why a company may decide to sell off or divest itself of some of its assets. Here are some of the most common ones: 1. Bankruptcy:Companies that are going through bankruptcy will need to sell off parts of the business. 2. Cutting back on locations:A company may find it has too many locations. When consumers just aren't coming through the d…
Examples of Divestitures
- Divestitures can come about in many different forms, including the sale of a business unit to improve financial performance and due to an antitrust violation.
What Is Divestiture?
How Does Business Divestiture Work?
- Your company launched a product/service that hasn’t generated sufficient profit that you were expecting it. You invested some capital in the marketing and promotional campaignsto target and attract more customers, instead of finishing it. You realized that investing more capital was a bad idea and it isn’t working anymore. It’s important to mention here the concept of sunk cost. Peopl…
Reasons to Consider For A Divestiture
- Businesses and companies follow the divestiture strategies for the following reasons and they’re as follows;
Consideration Before You Divesting
- Here are some of the following points you should consider before implementing the divestiture strategy;
Divestiture Examples
- As we know that divestiture could take many forms, the most obvious form is to sell your company’s divisions in order to improve the financial position. A Canadian media and information multination company, Thomson Reuters divested its science and intellectual property divisions in 2016. The goal was to decrease the leverage in the balance sheet. Onex and Baring Private Equit…
Steps in The Divestiture Process
- Divesting involves several steps, as enumerated below: The process of divesting outlined below is typically managed by professionals working in the Corporate Developmentdepartment of a corporation.
Benefits of Divesting
- Required Rate of Return
A decision to divest a business unit can arise from its underperformance in terms of meeting its required rate of return as shown by its Capital Asset Pricing Model. This means that holding on to the business unit will be detrimental to shareholders, as this is essentially holding on to a negati… - Strategic Focus
Divesting enables a company to reallocate resources into their core areas of expertise that ideally generate higher returns on time and effort. One of the issues with diversification within a company is that managerial dis-economies occur. This means that taking on non-core business …
Costs of Divestitures
- Direct Costs
Some of the direct costs of divestitures include the transaction and transition costs associated with the decision. This includes bringing in the people, processes, and tools required to execute the divestiture process, which involves things such as managing the legal transfer of assets, val… - Signaling
Signaling may impose a cost on a company’s decision to divest due to information asymmetry in the capital markets. External investors may not possess sufficient knowledge of the company to make the correct assumptions about its future performance as the result of a managerial decisi…
Related Readings
- We hope the CFI guide to divesting has been helpful to you. Advance your financial education further with the following free CFI resources: 1. Asset Purchase vs Stock Purchase 2. Equity Carve-out 3. Spin-off vs Split-off 4. Financial Analyst Program
Divestiture Corporate Strategy
Divestiture Process – Seller Benefits
AT&T Divestiture Example
Types of Divestitures
- A wide range of different transaction structures could be categorized as divestitures. However, the most common variations of divestitures are the following: 1. Sell-Off: In a sell-off, the parent exchanges the divested assets to an interested buyer (e.g. another company) in return for cash proceeds. 2. Spin-Offs: The parent company sells a specifi...
Divestiture vs Carve-Out