Divestment

This article is about the routine business practice. For politically motivated boycott, see disinvestment.

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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. Divestitures have been growing in significance as a means of creating value for companies on both sides of M&A transactions, representing nearly half of all corporate transactions in 2013.^[1]

Motives

Firms may have several motives for divestitures:

1. a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak, Ford Motor Company, Future Group and many other firms have sold various businesses that were not closely related to their core businesses.
2. to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.
3. a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
4. divesting a part of a firm may enhance stability. Philips, for example, divested its chip division - NXP - because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.
5. divesting a part of a company may eliminate a division which is under-performing or even failing.
6. divesting a company may increase tax efficiencies through the relocation of personnel, facilities, or assets.^[2]
7. regulatory authorities may demand divestiture, for example in order to create competition.
8. pressure from shareholders for social reasons (sometimes also called disinvestment). Examples include disinvestment from South Africa in the former era of apartheid (now ended), and more recent calls for fossil fuel divestment in response to global warming.

Divestment for financial goals

Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. To achieve desired cost reductions in a divestiture, companies should rigorously examine selling, general, and administrative expenses and shared service functions.^[3] Sometimes, such an action can be a spin-off. (For the United States: Divestment of certain parts of a company can occur when required by the Federal Trade Commission before a merger with another firm is approved. A company can divest assets to wholly owned subsidiaries.)it is a process of selling an asset. The largest, and likely most famous, corporate divestiture in history was the 1984 U.S. Department of Justice-mandated breakup of the Bell System into AT&T and the seven Baby Bells.

Method of divestment

Some firms are using technology to facilitate the process of divesting some divisions. They post the information about any division that they wish to sell on their website so that it is available to any firm that may be interested in buying the division. For example, Alcoa has established an online showroom of the divisions that are for sale. By communicating the information online, Alcoa has reduced its hotel, travel, and meeting expenses.

Firms use transitional service agreements to increase the strategic benefits of divestitures. These contracts compel the seller to provide corporate functions from the legal close of the deal until the new company or buyer transitions to its own support solutions.^[4]

Many companies today, are using a disaggregation strategy. This is when a company separates a low-growth division from a higher-growth division, creating a higher valuation for the high-growth division.^[5]

With economic liberalization of the Indian economy, Ministry of Finance of India had set up a separate Department of Disinvestments.

See also

• Consolidation (business)
• Corporate social responsibility
• Demerger
• Disinvestment
• Fossil fuel divestment
• Financial economics
• Tax resistance

References

• Jeff Madura (2007). Introduction to Business, Fourth Edition. USA: Thomson South-Western. ISBN 0-324-36079-7. 

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