What Is a Divestiture?
A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture is often the result of a strategic decision by management to terminate operations in a certain business unit either because it no longer aligns with the company’s core competencies or lacks profitability.
Divestitures may also be necessitated by conditions such as redundancy after a merger or acquisition, to boost the firm’s valuation, or court orders to improvemarket competition.
Key Takeaways
- A divestiture is when a company or government disposes of all or some of its assets by selling, exchanging, closing them down, or through bankruptcy.
- Companies may divest to streamline their operations, focus on core business areas, or enhance shareholder value.
- Divestitures help in cost reduction, debt repayment, reinvestment in core businesses, and boosting overall company efficiency.
Insight into Divestitures
A divestiture pertains to the sale or disposal of a company’s assets as a means to manage its portfolio efficiently. Operating in various business lines can dilute the focus and profits, therefore, companies might divest to concentrate on more profitable sectors.
Companies facing financial hardships might sell off segments to stabilize. For instance, a struggling automobile manufacturer could sell its financing arm to fund new vehicle development.
Assets put up for divestiture can be spun off into independent entities or prescribed as part of merger terms. This strategy is also employed by governments for privatization, often to mitigate debt.
By divesting non-core or less profitable assets, a company can substantially trim costs, repay debts, reallocate efforts into central areas, and augment shareholder value.
Driving Factors Behind Divestitures
Multiple motives drive companies to divest some of their assets, including:
- Bankruptcy: Companies undergoing bankruptcy may need to liquidate parts of the business.
- Location Reduction: Market saturation or poor foot traffic might compel a business to close or sell underperforming locations.
- Sale of Underperforming Assets: Persisting with low-demand products can hurt profitability, so selling off such segments helps concentrate on successful ones.
- Political Divestiture: Ethical or political issues may lead to divestitures, for instance, firms might avoid assets with controversial geopolitical ties.
Moreover, regulations can force businesses to divest to prevent monopolistic dominance.
Notable Examples of Divestitures
Divestitures manifest differently, driven by diverse strategic, financial, and regulatory reasons.
Meta-Giphy Sale
In 2023, Meta (formerly Facebook) sold Giphy to Shutterstock for $53 million, an 83% loss from the acquisition price. This sale was enforced by U.K. regulators deeming the initial purchase as anticompetitive under local antitrust laws.
Kellogg Split
In 2022, Kellogg decided to split into three distinct entities. The legacy company would focus on high-revenue snack foods, while the new entities would handle cereals and plant-based food products.
Why Companies Divest from Israel?
In 2002, Archibishop Desmond Tutu initiated a campaign urging global investors to divest from Israel due to the conflict involving Palestinian territories. Various universities and religious groups followed suit, divesting from Israeli investments.
Impact on Employees During Divestitures
Employees are significantly affected in divestitures with overlaps in duties across entities—a company must discern who moves into the new entity and who stays. Additionally, acquisition of divested assets can result in job redundancies. Transparency on divestiture plans is crucial for maintaining staff morale.
The 1982 AT&T Divestiture
A landmark divestiture, the breakup of AT&T in 1982, resulted from U.S. antitrust actions. The company was split into seven entities to mitigate monopolistic control over telecom services.
The Bottom Line
A divestiture is a strategic move where a company segments part of its operations, frequently to concentrate on core activities, raise funds, or counter unproductive business units. Regulatory pressures can also compel divestitures, especially when a entity threatens to monopolize the market.
Related Terms: Mergers, Acquisitions, Bankruptcy, Core Competency, Spin-Off, Privatization.
References
- CNBC. “Facebook-Giphy Sale Shows How Fear of Regulators Is Slowing M&A Market”.
- Kellogg’s. “Kellogg’s Announces Separation of Two Businesses as Bold Next Step in Portfolio Transformation”.
- Chron. “How Does a Divestment Strategy Affect Employees?”
- The U.S. Department of Justice. “The AT&T Divestiture: Was it Necessary? Was It a Success?”
