Divestiture

calender iconUpdated on January 19, 2024
corporate finance and accounting
mergers & acquisitions

Definition:

Divestiture is the process of a company selling a subsidiary or asset to another company. It is typically used to reduce the company’s size, eliminate non-core businesses, or raise capital.

Reasons for Divestiture:

  • To focus on core businesses: Companies may divest assets that are not core to their primary operations, allowing them to concentrate resources on their main businesses.
  • To raise capital: Divestiture can generate cash flow, which can be used for debt reduction, expansion, or other investments.
  • To reduce debt: Companies may divest assets to reduce their debt burden.
  • To improve operational efficiency: Divesting businesses that are not profitable can streamline operations and improve overall efficiency.
  • To exit a market: Companies may divest assets to exit a particular market or industry.

Types of Divestiture:

  • Partial divestiture: Sale of a portion of a subsidiary or asset.
  • Complete divestiture: Sale of the entire subsidiary or asset.
  • Spin-off: Creation of a new company by extracting a subsidiary or asset from the parent company.

Process of Divestiture:

  1. Identifying potential buyers: Companies identify potential buyers who are interested in the asset or subsidiary.
  2. Negotiation: The company and buyer negotiate the terms of the divestiture.
  3. Due diligence: The buyer conducts due diligence to assess the value and condition of the asset or subsidiary.
  4. Finalization: The divestiture is finalized with the signing of a binding agreement.

Examples:

  • A company may divest a subsidiary that is not profitable.
  • A company may divest a factory to reduce debt.
  • A company may spin off a division to create a new company.

Benefits of Divestiture:

  • Increased focus on core businesses
  • Improved financial performance
  • Reduced debt
  • Increased liquidity
  • Opportunity to exit unwanted markets

FAQ's

What does it mean to divest something?

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Divesting means selling or removing an asset or business unit to refocus or cut costs.

What is divesting in business?

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What is a divestiture?

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What are the types of divestitures?

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Can you give an example of a divestment strategy?

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