What Is a Divestiture?
A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a company's core competency.
A divestiture may also occur if a business unit is deemed to be redundant after a merger or acquisition, if the disposal of a unit increases the sale value of the firm, or if a court requires the sale of a business unit to improve market competition.
Key Takeaways
- A divestiture is when a company or government disposes of all or some of its assets by selling, exchanging, closing them down, or through bankruptcy.
- As companies grow, they may become involved in too many business lines, so divestiture is the way to stay focused and remain profitable.
- Divestiture allows companies to cut costs, repay their debts, focus on their core businesses, and enhance shareholder value.
Understanding Divestitures
A divestiture is the disposition or sale of an asset by a company as a way to manage its portfolio of assets. As companies grow, they may find they're in too many lines of business and must close some operational units to focus on more profitable lines. Many conglomerates face this problem.
Companies may also sell off business lines if they are under financial duress. For example, an automobile manufacturer that sees a significant and prolonged drop in competitiveness may sell off its financing division to pay for the development of a new line of vehicles.
Divested business units may be spun off into their own companies. Companies may be required to divest some of their assets as part of the terms of a merger or acquisition. Governments may divest some of their interests or property—called privatization—to raise money to pay off debt or give the private sector a chance to profit.
By divesting some of its assets, a company may be able to cut its costs, repay its outstanding debt, reinvest, focus on its core business(es), and streamline its operations. This, in turn, can enhance shareholder value. Large companies experiencing unstable market conditions and competitive pressures may divest part of their business.
Divesting Assets
There are many different reasons why a company may decide to sell off or divest itself of some of its assets. Here are some of the most common ones:
- Bankruptcy: Companies that are going through bankruptcy will need to sell off parts of the business.
- Cutting back on locations: A company may find it has too many locations. When consumers just aren't coming through the doors, the company may be forced to close or sell some of its locations. This is especially true in the retail sector, including in fashion, banking, insurance, food service, and travel.
- Selling losing assets: If the demand for a product or service is weaker than expected, a company may need to sell it. Continuing to produce and sell an underperforming asset can cut into the company's bottom line when it can concentrate on those that are performing well.
- Political divestiture: Companies may divest from certain assets due to political or ethical liabilities. Examples include the movement to divest from fossil fuels, or the movements to divest from geographies that are politically controversial, like Israel or Russia.
Government regulation may require corporations to divest some of their assets, especially to avoid a monopoly.
Examples of Divestitures
Divestitures can come about in many different forms, including the sale of a business unit to improve financial performance and due to an antitrust violation.
Meta-Giphy Sale
In 2023, Meta (formerly Facebook) sold the animation database Giphy to Shutterstock for $53 million. That was an 83% loss from what the company had paid for Giphy just three years earlier. The sale was forced by U.K. regulators, who believed that Facebook's acquisition of the gif-animation platform represented a violation of the country's antitrust laws.
Kellogg Split
In 2022, foods manufacturer Kellogg announced its plans to split into three separate companies, spinning off its cereal and plant-based food brands. While the legacy Kellogg's company will focus on the frozen breakfast and snack foods that bring in 80% of the old company's revenue, the spin-offs will focus on the cereal markets and plant-based foods.
Why Are Companies Divesting From Israel?
In 2002, archbishop Desmond Tutu launched a campaign calling on international investors to divest from Israel over the country's alleged colonization of the West Bank and other occupied Palestinian territories. Several high profile institutions, including universities and church groups, have reduced or eliminated investments in Israeli companies and businesses.
What Happens to Employees in a Divestiture?
When a parent company divests part of its business, there may be some overlapping employees who ordinarily perform work for both entities. When that happens, the company will have to decide which employees will move into the new entity and which will remain part of the parent company. In addition, if the divested entity is purchased by another company, there may be some employee redundancies that lead to layoffs at the new company. It is important for companies to be transparent about their divestiture plans in order to maintain employee morale.
What Led to the AT&T Divestiture in 1982?
One of the most famous cases of court-ordered divestiture involves the breakup of the old AT&T in 1982. The U.S. government determined AT&T controlled too large a portion of the nation's telephone service and brought antitrust charges against the company in 1974. The divestiture created seven different companies, including one retaining the name AT&T, as well as new equipment manufacturers.
The Bottom Line
A divestiture happens when a company decides to sell or spin-off part of its business into a new entity. Companies may divest in order to focus on a core competency, raise cash, or reduce exposure to an underperforming business segment. They may also divest due to regulatory pressure if the combined entity has too large of a market share.
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