What is Divesture? Definition, Types, Example, 10+ Facts

When an organization or government agency sells, trades, closes down, or goes bankrupt and disposes of all or a portion of its assets, this is referred to as a divesture.

Too many business lines are a typical issue for major firms as they grow, and divestiture is the greatest strategy for keeping operations focused and profitability high. Continue reading to get all of the information you need.

What is Divesture?

The sale, exchange, closure, or bankruptcy of a corporate unit is referred to as a divestiture. When a company’s management determines that a particular division is no longer necessary for the company’s operations, it may elect to sell or otherwise dispose of it.

What is Divesture?

Business units may be sold if they are deemed redundant following a merger or acquisition, if the sale of a unit increases the firm’s selling value, or if a court orders the sale of a business unit to increase market competition.

Understanding Divestures

A company may elect to sell or otherwise dispose of some assets as part of its asset management. When a firm grows, it may realize that it is involved in too many markets, causing it to close down some of its divisions in order to focus on the most profitable. This is a problem for many large corporations.

If a corporation is in financial trouble, it may opt to sell off some sections. For example, a vehicle firm that sees a significant and continuous decrease in competitiveness may opt to sell off its financial division to fund the development of a new line of autos.

Diverted divisions can be created into separate corporations. Some merger and acquisition agreements require the acquiring or merging corporation to divest certain assets.

Privatization is the process by which a government sells a portion of its assets to the private sector in order to generate cash, either to lower the government’s debt load or to raise the possibility of profit for the private enterprise.

Companies frequently divest non-core holdings in order to focus on what they do best, cut costs, consolidate resources, and streamline operations. As a result, shareholder value may benefit. Large corporations may opt to sell off segments or even the entire company as a result of market volatility and strong rivalry.

Divesting Assets

For a variety of reasons, a company may decide to sell or divest part of its assets. Here are a few examples of the most common:

What is Divesture?

  1. Bankruptcy: Companies will have to dispose some assets in the case of bankruptcy.
  2. Cutting back on locations: A company may find it has too many locations. When consumers just aren’t coming through the doors, the company may be forced to close or sell some of its locations. This is especially true in the retail sector, including in fashion, banking, insurance, food service, and travel.
  3. Selling losing assets:Businesses may be forced to liquidate unsold inventory if demand is lower than expected. When a company’s resources may be better spent manufacturing and selling more valuable assets, continuing to produce a dud can damage its bottom line.

Government regulation may compel certain businesses to sell off sections of their operations in order to avoid monopolization.

Examples of Divestures

Divestments can occur for a number of reasons, including a desire to boost earnings or the necessity to settle an antitrust case.

Thomson Reuters

Thomson Reuters, a Canadian media and information giant, sold its Intellectual Property and Science division in July 2016. The company’s goal to reduce its debt load drove the transaction. Onex and Baring Private Equity paid $3.55 billion in cash for the business unit.

Thomson Reuters earned $12.209 billion in 2015. In 2015, the Intellectual Property and Science division provided 8% of Thomson’s total revenue and increased its pre-existing revenue by 1% over the previous year. Only 3,400 of Thomson’s 52,000 employees were allocated to this division.

AT&T

Sometimes it is essential to sell something, which is referred to as a divesture. The first AT&T split in 1982 is frequently highlighted as an example of a high-profile court-ordered divestment.

The United States government brought antitrust charges against AT&T in 1974, claiming that the company had too much monopolistic power in the domestic telephone market.

The AT&T brand was retained by one of the seven companies that emerged from the sale, while the others became equipment manufacturers.

Types of Divestures

Divestments can relate to a wide range of different sorts of transactions. Divestments take numerous forms, but the most common are given here.

Sell-Off:Parental assets are sold for cash to third party (such as another corporation).

Spin-Offs: When a corporation sells a piece of its business, it creates a new company known as a subsidiary, and the company’s present shareholders receive shares in the newly established company.

Split-Ups: A new corporate entity is established, similar to a spin-off, but current shareholders are offered the choice of preserving their shares in the original firm or in the newly formed company.

Carve-Out: Carve-outs are a type of partial divesture in which a parent company sells off a portion of its core operations in an initial public offering (IPO), creating a new pool of shareholders; after the IPO, the parent company and the subsidiary are treated as two separate entities under the law, though the parent will typically retain some ownership in the subsidiary.

Liquidation: A forced liquidation is the selling of assets in increments mandated by the court, generally during a bankruptcy case.

What is Divesture?

How do Divestures Happen?

Divestment can occur in a variety of ways. A spin-off is the process of demerging an existing division into a distinct organization. The main company survives a demerger, while the subsidiary does not.

A demerger is the process of dividing one organization into numerous new ones. The parent company is divided during a demerger.

A parent company sells shares in a subsidiary through its own IPO in an equity carve-out. While it retains control of the subsidiary, it has granted public shareholders a stake in the company.

When one corporation sells a division to another, the division is said to have been “sold off.” You gain money while not having to bother about running the subsidiary.

Divesture Corporate Strategy

In mergers and acquisitions, divestures include the sale of assets or whole company divisions.

The following are some common strategic reasons for selling assets:

  • Subsidiary of the primary business operations
  • Disagreement with the Long-Term Strategy of the Company
  • We have a serious financial problem that requires immediate attention.
  • Activist Investor Pressure
  • Monopolies Face Regulatory Squeeze
  • Operations Restructuring

When a company decides to sell off a specific asset or line of business, it is usually because higher management has determined that the unit contributes too little value to the entire corporation.

In theory, firms should sell off a portion of their activities only if it is no longer in keeping with the main strategy of the company or if the assets would be more lucrative off the books.

If a corporate unit provides no meaningful purpose, is copied by another unit, or diverts attention away from the firm’s essential tasks, it may be abolished.

Selling off non-essential assets may be interpreted as management admitting defeat and communicating to present shareholders and other investors that the non-core business did not provide the promised advantages.

Because the goal is to generate cash profits to fund reinvestment or to reposition themselves strategically, a divestment choice indicates that a division turnaround is not possible (or not worth the effort).

What Are the Reasons Divestures Occur?

In the financial industry, a divestment or divestiture is the transfer of ownership of an asset through a sale, exchange, or liquidation. Non-core assets are commonly sold off as part of the merger, acquisition, or consolidation process. Combining two businesses, for example, may result in service duplication.

What is Divesture?

Through divestment, the firm can boost production while decreasing costs. However, there are a number of reasons why firms sell assets, and not all of them are beneficial to the corporation.

Bankruptcy

Asset sales are a regular part of the bankruptcy process that many businesses must go through due to operational and financial challenges. As a consequence of the sale, the company may be able to cut costs, increase cash flow, and avoid bankruptcy.

In 2009, for example, GM filed bankruptcy and closed eleven unproductive assembly sites. The corporation sold off unprofitable brands such as Saturn and Hummer as part of its reorganization.

Raise Cash

The need for quick cash is a common reason for selling anything. This is critical for organizations who are experiencing operational and financial difficulties. Sears Holdings, for example, saw its revenue and earnings plummet and incur losses.

In 2014, the business announced the sale of its real estate holdings as part of its survival plan. The money would go toward the company’s ongoing retail business reorganization.

Despite the fact that it has liquidated hundreds of stores and used the proceeds from its divestments to pay down some of its debt, Sears, which also owns Kmart, has struggled since emerging from bankruptcy in 2019.

Non-Core Businesses

Many businesses sell off subsidiary activities known as divestments in order to focus on what they do best. Union Carbide, a significant manufacturer of industrial chemicals and plastics, sold its consumer goods sector in 1989 in order to focus on its core skills.

WeWork Corporation, which rents out shared office space, faces financial troubles in 2020. As a result, the company’s executives have opted to divest part of its software and content marketing divisions.

Earnings

Divestment often improves a company’s financial stability. Earnings are synonymous with net income or profit. In 2006, Philips, a major Dutch technology business, divested its NXP Semiconductors semiconductor branch.

The sale of NXP was motivated primarily by the negative impact on Philips’ stock price that the chip business’s high volatility and unpredictability were having on profitability.

Strengthen the Balance Sheet

When a firm’s senior executives state that they wish to take actions to strengthen the balance sheet, they typically mean that they aim to lower the amount of debt that the company carries.

General Electric Company (GE) is one example. In 2020, it announced the completion of the divesture of its BioPharma unit, for which it received about $20 billion in cash. GE chair and CEO H. Lawrence Culp Jr. stated in a news statement that the purchase helped “de-risk our balance sheet and continue to protect our financial position.”

Unlock Value

When a business’s value can be unlocked more efficiently as two or more firms rather than as one, the parent company will usually split into those new companies. This is especially important throughout the liquidation process.

It is common known that when a company’s real estate, equipment, trademarks, patents, and other intangible assets are sold separately from the rest of the firm, investors are willing to pay a premium for them.

Underperformance

It is typical practice for firms to sell off underperforming segments. These sales may be directed towards subsidiaries or divisions that aren’t fulfilling expectations.

Target, a large American retailer, is an excellent example of a business that effectively sold itself of a non-core asset. Target stores in Canada failed to flourish due to low local demand. Target announced in 2015 that it would end operations in Canada and begin shutting or selling its stores.

Regulations

Companies may be required to sell assets for legal reasons, such as antitrust concerns. Bell Systems was a famous example of a corporation that was compelled to divest owing to governmental restrictions in 1982.

What is Divesture?

To contest Bell’s monopoly in the telecommunications industry, the US government compelled its breakup, resulting in the development of various other corporations, including AT&T.

How is a Divesture Carried Out?

Businesses frequently divest in order to better manage their assets. There are several approaches that may be taken to properly carry out the disposition.

1. Partial sell-offs

Businesses frequently sell off non-core sections in order to acquire funds and reinvest it in their core activities.

2. Spin-off demerger

The procedure of forming a new corporate organization from an existing division or unit.

3. Split-up demerger

The original corporation no longer exists once a company has been divided into multiple units.

4. Equity carve-out

Corporations utilize an initial public offering (IPO) to sell a stake in a wholly-owned subsidiary while maintaining total control over the company.

Divesture Process – Seller Benefits

A successful divestiture enables the parent company to handle a common difficulty for market leaders: lowering costs and refocusing on the company’s core business.

If the merger or purchase is poorly executed, the value of the combined business is less than the value of the independent firms; hence, the two entities would be better off continuing to operate independently.

“Negative synergies” arise when shareholder value reduces following a transaction as a result of the acquisition of enterprises without a long-term plan for integration.

As a result of the sale, the selling parent company may be left with:

  • Increased Profit Margin
  • Streamlining That’s Both Functional and Efficient
  • Sales Revenue Boosted Cash Flow
  • Focus has been adjusted to better suit core functions.

As a result, divestments are a method of cutting costs and restructuring operations; also, the divested business unit may be able to release “hidden” wealth creation that was inhibited owing to bad management on the side of the parent organization.

How to Decide If a Divesture Is Worth It

When deciding whether or not to sell an asset, a company’s long-term objectives should be addressed.

Even if a company is low on cash right now, it should keep a profitable subsidiary with tremendous development potential. If the estimated return on investment is minimal, it may be profitable to sell the subsidiary or asset.

Another factor that organizations examine is the product’s estimated lifetime. If an asset is still in the introduction or growth phase, this is an excellent sign of whether it is worth keeping on to. If it has attained maturity or is decreasing, it may be time to sell.

The most liquid portion of a company’s balance sheet is its current assets. Businesses should use profitability data, gross profit margin analysis, and break-even analysis when deciding whether to sell.

When a company sells its present assets, this is referred to as a divesture. A divestiture might be triggered by the underperformance of an asset, the bankruptcy of a corporation, or the need to close a store.

Divestments include spin-offs, demergers, partial sales, and equity carve-outs. Before beginning a divesture, elements such as life cycle, long-term goals, asset kind, and profitability are considered.

Divesture vs Carve-Out

A carve-out is often referred to as a “partial IPO” since the parent company sells a portion of its equity stake in the subsidiary to public investors.

The parent’s ownership of a significant (typically more than 50%) interest in the new entity distinguishes carve-outs.

Following the completion of the carve-out, the subsidiary became its own autonomous legal entity with its own set of leaders and board of directors.

The initial carve-out plan may specify that the cash proceeds from the sale to third-party investors be shared equally between the parent and the subsidiary, or equally between both.

Relation to Mergers And Acquisitions (M&A)

It is usual practice to list divestment transactions with M&A activity. Most people identify M&A with the buyer (acquiring a firm), but sellers (companies unwilling to maintain underperforming or non-essential assets) are actively looking to optimize their operations through M&A as well.

What is Divesture?

The constant process of reviewing and upgrading the firm’s asset portfolio is an essential component of every successful business plan.

Corporate Development And Investment Banking

The most actively involved financial experts in the actual sale of assets and business units are investment bankers and corporate development executives.

Investment banking and corporate development professionals utilize financial modeling and other approaches to evaluate the value of a disposed asset.

Conclusion

The process of selling or otherwise transferring ownership of an asset is referred to as “divestiture.” Divestment is often spelt “divestiture” or “divestment.” Asset disposal can be accomplished for a variety of reasons and in a variety of ways.

To keep things simple, suppose a car manufacturer believes it would be better off without its experimental aviation division. The logic for this decision is that the experimental aviation division is more valuable on its own, and the vehicle production industry would profit from concentrating on its core skill.

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