Reviewed by Oct 05, 2020| Updated on
Divestiture is partial or complete disposal by sale, swap, close or bankruptcy of a business entity. A divestiture most frequently arises from a decision by management to stop operating a business unit because it is not part of core competency.
A divestiture can also occur if a business unit is considered obsolete following an alliance or acquisition, if the disposal of a group increases the company's resale value or if a court orders a business unit to be sold to boost market competitiveness.
Companies can also sell outlines of business if they are under financial pressure. For example, an automobile manufacturer seeing a significant and prolonged decline in competitiveness may sell off its financing division to pay for a new line of vehicles to develop.
Divested company divisions may be spun off into their own companies rather than being close to bankruptcy or a similar outcome. Before the deal goes through, companies may be required to divest some of their assets as part of the terms of a merger. Governments can divest some of their interests to allow the private sector to make a profit.
By divesting some of its assets, a firm can reduce its costs, repay its outstanding debt, reinvest and focus on its core business(s), and streamline its operations. This, in turn, could increase shareholder value. This is important when there is market volatility or when the company is experiencing unstable conditions.
Divestitures can happen in several different forms. Sale of a business unit to boost financial results is the most popular type. For example, in July 2016, Thomson Reuters, a global Canadian-based mass media and information corporation, sold its division of intellectual property and sciences (IP&S). The organisation undertook the divestiture because its balance sheet needed to reduce the amount of leverage.