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