Get the lowdown on business divestment (divestiture), some reasons to do it and the different types.
What is divestment in business?
Divesting an offering refers to the strategic process of disposing of assets or relinquishing ownership. This can be achieved through various means, including the sale of intellectual property rights, engaging in mergers and acquisitions, or complying with liquidation court orders. Corporate divestments enable companies to streamline their focus, maximize profitability, and effectively manage their portfolios.
Divestments vs divestitures
There is no discernible difference between divestitures and divestments. They are two words that essentially mean the same thing. It appears as though “divestiture” is the preferred term in US parlance, whereas it’s more common to speak of “divestments” in Australia and UK.
Disinvestment vs divestment
The difference between disinvestment and divestment is nominal and appears to be one of scale. Disinvestment, meaning the sale of shares, can happen in small lots at any time to raise funds without losing control of the asset. Divestment or divestiture, on the other hand, usually refers to the sale of controlling shares.
Divestments vs liquidation
In essence, a divestment is the opposite of an investment. Whereas, liquidation is the act of liquidating an asset—that is, turning something with a lesser “liquidity”, like property, into ready cash. They both involve selling or exchanging an asset for money.
Divestments vs M&A
Generally speaking, we think of mergers and acquisitions as concerned with making a deal to buy or merge with another company. Divestments, on the other hand, involve the act of selling or disposal. In other words, the organization is looking to divest itself of certain assets rather than invest in them.
Top 3 reasons for divestitures
Here are three reasons why companies choose to divest.
1. To raise funds
One of the top reasons for divestments is to raise funds in order to pay fines, bills, or other debts. This can help organizations in financial distress to avoid bankruptcy.
See also: Corporate Insolvency
2. To optimize business performance
After undertaking a strategic review, a company might decide to divest an under-performing business unit, product, or branch. This could lead to, or be a part of, a proactive corporate restructure.
3. To increase resale value
If a business divides up and sells off individual business units, rather than selling the whole company at market value, it usually results in a higher sale value.
See also: Selling a Business
Types of divestiture
1. Sell-offs/liquidation
The most basic form of divestment, in a sell-off, the parent company gets cash in return for the divested assets.
2. Carve-outs
A carve-out involves the IPO of a piece of the company’s core operations, which establishes a new pool of shareholders. The parent and the subsidiary become two separate legal entities, but usually the parent retains some equity.
3. Spin-offs
In a spin-off, the company sells a specific business unit, which then becomes a new entity in which existing shareholders are given shares.
4. Split-ups
Like a spin-off, only the existing shareholders have the option to either keep shares in the parent or put them in the newly created entity.
