Divestment definition
/What is a Divestment in Business?
Divestment is the process of eliminating assets from an organization. The general reason for doing so is to increase the value of a business by reorienting its capital into better investment opportunities.
Reasons for Divestment
There are many reasons for engaging in an asset divestment. Here are several examples:
Underperforming assets. Assets are underperforming, so they are sold to generate cash for investment in more promising opportunities. This is an especially useful option when a business does not have sufficient excess funding to pay for new initiatives.
Regulatory requirement. Regulators mandate that a company sell off certain subsidiaries; this is most common in a heavily controlled industry. For example, a regulator might mandate that an operator of television stations divest itself of a station in a market in which it is overly concentrated.
Concentrate on core activities. A business might sell assets related to peripheral activities in order to concentrate its efforts on the organization’s core activities. This is most useful when management is overstretched in its ability to oversee operations.
Acquisition avoidance. Management might sell prime assets in order to make the business look less valuable to a corporate raider. This is most likely when the prospective acquirer is a hostile entity.
Debt pay down. Management might sell assets in order to raise cash to pay down debt, thereby giving the business a more conservative financial profile. This is a useful option when interest rates are excessively high, or the debt burden is oppressive.
Minimize environmental damage. Management might sell off assets in order to eliminate anything causing environmental damage. The cost of environmental remediation can be massive, so this can be considered loss avoidance. These types of remediation have caused some businesses to declare bankruptcy, so this is not a minor issue. Furthermore, selling these assets may improve the profile of the remaining business with stakeholders and environmental activists.
Spin-Offs
Some divestments take the form of spin-offs, where subsidiaries are set up as separate enterprises that are owned by the former parent company’s investors. Spin-offs do not result in any cash inflow to the former parent company. Instead, cash only flows to the investors if they subsequently sell their shares in the spun-off business.