Divestment is the process of selling subsidiary assets, investments, or divisions of a company to maximize the value of the parent company. Known as divestiture, divestment is the opposite of an investment and is usually executed when the subsidiary asset or division is not performing up to expectations.
In some instances, a company might be forced to sell assets due to legal or regulatory action. Companies can also adopt a divestment strategy to achieve strategic business, financial, social, or political goals.
Key Insights
- Streamline for Success: Divestment occurs when a company sells off some or all of its assets or subsidiaries.
- Reactive Measures: While most divestment decisions are proactive efforts to streamline operations, forced selling could result from regulatory or legal actions such as bankruptcy.
- Various Forms: Divestment can manifest as spin-offs, equity carve-outs, or direct sales of assets.
Unraveling the Divestment Process
Divestment involves a company selling a portion of its assets to boost company value and operational efficiency. Many companies use divestment to offload peripheral assets, enabling management teams to focus more sharply on core business operations.
Divestment can stem from either a corporate optimization strategy or be spurred by external circumstances. Companies might withdraw and reduce investments from particular regions or industries due to political or social pressures. The pandemic’s impact, remote work trends, and exponential technology adoption have significantly affected the commercial real estate sector.
Items often divested include subsidiaries, business departments, real estate holdings, equipment, and other property or financial assets. Proceeds from these sales are usually allocated toward debt reduction, capital expenditures, working capital funding, or distributing special dividends to shareholders.
Whether it’s a planned initiative or necessitated by regulatory action, asset sales through divestment generate revenue that can be used across the organization. This increased revenue benefits organizations by reallocating funds to underperforming divisions, typically within the restructuring and optimization activities framework.
Forms of Divestment
Divestment generally takes the following forms:
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Spin-offs: These non-cash, tax-free transactions occur when a parent company distributes shares of its subsidiary to its shareholders, turning the subsidiary into a stand-alone company with tradable shares. Spin-offs are common in companies housing two separate businesses with distinct growth or risk profiles.
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Equity Carve-outs: In these transactions, a parent company sells a certain equity percentage in its subsidiary to the public via a stock market offering. Often tax-free, equity carve-outs involve exchanging cash for shares, allowing the parent to maintain a controlling stake. This is beneficial for financing growth opportunities and setting up trading venues for subsidiary shares.
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Direct Sale of Assets: A parent company sells assets such as real estate or equipment to another party. These sales involve cash and might trigger tax liabilities if assets are sold at a gain. Urgent divestiture scenarios could lead to
fire saleswhere assets are sold below book value.
Core Reasons for Divestment
The primary reason for divestment is to eliminate non-performing, non-core businesses. Large corporations or conglomerates often own diverse business units operating in various industries, which can be challenging to manage. Divesting such units can free up time and capital for focusing on core competencies.
For instance, in 2014, General Electric (GE) divested its non-core financing arm by selling its shares of Synchrony Financial through a spin-off. Additionally, companies might divest assets to acquire funds, dispose of underperforming subsidiaries, comply with regulatory requirements, or realize value from break-ups.
Lastly, divestment can be motivated by political and social reasons, such as discontinuing assets contributing to global warming.
Related Terms: Investment, Subsidiary, Spin-off, Equity Carve-out, Asset Sale, Bankruptcy, Conglomerate, Core Competencies.
