In finance, divestment or divestiture is defined as disposing of an asset through sale, exchange or closure. A divestiture is an important means of creating value for companies in the mergers, acquisitions and consolidation process. A common reason for divestiture is selling a non-core line of business. Companies also divest as part of the bankruptcy process, as well as to obtain funds, enhance stability and break themselves into parts believed to have greater value than the consolidated company. In addition, companies engage in divestiture to eliminate subsidiaries or divisions that are underperforming and to comply with regulatory requirements.
Companies may divest businesses that are not part of their core operations so that they can focus on their primary lines of business. In 1989 Union Carbide, a well-known manufacturer of industrial chemicals and plastics, decided to spin off its non-core consumer group business so it could focus more on its core business matters.
Companies often undergo bankruptcy due to their operating and financial problems, and divestiture is almost always part of this process when a healthier company emerges out of the bankruptcy. General Motors filed for bankruptcy in 2009 and closed at least 11 unwanted factories. It divested some of its unprofitable brands, such as Saturn and Hummer, as part of its reorganization plan.
Another common reason for divestiture is to obtain funds. This is especially important for companies experiencing operating and financial difficulties. For example, Sears Holdings, a consumer retail company, struggled with declining sales and negative cash flows. In 2014, as part of its survival plan, the company announced a divestiture of its real estate holdings to raise funds to continue reorganizing its retail business.
Companies often divest to improve their bottom-line stability. In 2006 Philips, a Dutch diversified technology company, decided to divest its chip subsidiary, NXP Semiconductors. The primary reason for selling NXP was a high volatility and unpredictability of earnings for the chip business, which was hurting Philips’ stock value.
A firm often breaks up into two or more companies to unlock value believed to be greater for separate entities than that of a consolidated company. This is especially important during liquidation. For example, investors are willing to pay much more for different parts of the company separately, such as real estate, equipment, trademarks, patents and other parts, than to buy one single company.
Companies often divest parts of their business that are not performing up to their expectations. A notable example of such a divestiture was done by Target, a large consumer retailer. Target’s stores in Canada did not perform very well due to Canadian customers’ lackluster demand. Target decided to exit its Canadian line of business by shutting down its stores or selling them to interested parties.
Divestitures sometimes happen for regulatory reasons such as antitrust concerns by regulators. A prominent example of divestiture required by the regulatory authorities involved Bell Systems in 1982. Due to Bell’s monopoly position in the telecommunication industry, the U.S. government ordered the company’s breakup, creating many smaller companies, including AT&T.