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Divestment

Reviewed by Annapoorna | Updated on Oct 05, 2020

Catalogue

What is Divestment?

Divestment is the method of selling subsidiary properties, investments, or divisions to increase the parent company's value. Often known as the divestiture, it is the reverse of an acquisition which is generally achieved when the asset or division of the company does not meet expectations. Companies can choose to employ this strategy to achieve either economic, social, or political objectives.

Divestment entails a business selling its properties, often to increase its value and achieve higher performance. Assets that could be divested include a company, department of business, real estate, facilities, and other properties.

Need for Divestment

Divestment may either be due to a corporate restructuring strategy or be motivated by outside circumstances, such as decreasing investment and withdrawing companies from a specific geographic area or sector as a result of political or social pressure.

The most common reason for divestment is to sell non-core businesses. Companies may own various business units operating in different industries that may be quite distracting to their management teams.

Divesting a non-essential unit of business will free up time for management of a parent company to concentrate on its core operations and competencies.

In addition, businesses are divesting their properties to raise capital, selling an underperforming division, reacting to regulatory action and realising value through a break. Finally, for political and social reasons, corporations that engage in divestment, such as selling assets that contribute to global warming.

Most businesses use divestment to sell peripheral assets allowing their management teams to regain sharper core business attention. Usually, divestment proceeds are used to pay down debt, make capital outlays, finance working capital, or pay a special dividend to shareholders of a business.

Although most divestment activities are deliberate, attempts will be undertaken by the corporation. Often, as a result of regulatory action, this process could be forced upon them. Whatever the reason is, divestment can produce revenue that can be used elsewhere in the organisation. Over the short term, this increased income would benefit most companies in that they will be able to transfer the funds to another division that fulfils expectations.

Kinds of Divestment

Usually, divestment takes the form of a spin-off, equity carve-out, or direct asset sale. Spin-offs are non-cash and tax-free sales, where a parent company distributes to its shareholders' shares in its subsidiary.

The subsidiary thus is a stand-alone company whose shares can be exchanged on a stock exchange. Spin-offs are the most common among firms which consist of two separate firms with different growth or risk profiles.

Under the equity carve-out scenario, a parent company sells to the public through a stock exchange a certain amount of equity in its subsidiary. Equity carve-outs are tax-free sales, including cash exchange for shares.

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