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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 core competency. However, it 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 resale value of the firm, or if a court requires the sale of a business unit to improve market competition.

BREAKING DOWN 'Divestiture'

A divestiture, in its simplest form, is the disposition or sale of an asset by a company. Divestitures are essentially a way for a company to manage its portfolio of assets. As companies grow, they may find that they are trying to focus on too many lines of business, and they 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. Business units that are divested may be spun off into their own companies rather than closed in bankruptcy or a similar outcome.

Examples of Divestitures

Divestitures can come about in many different forms. However, the most common is the sale of a business unit to improve financial performance. For example, Thomas Reuters Corporation, a multinational mass media and information company based in Canada, sold its intellectual property and sciences (IP&S) division on July 14, 2016. Thomas Reuters initiated the divestiture because it wanted to reduce the amount of leverage on its balance sheet.

The division was purchased by Onex and Baring Private Equity for $3.55 billion in cash. The IP&S division booked sales of $1.01 billion in 2015, and 80% of those sales are recurring, making it an attractive investment for the private equity firm. The divestiture represented one-fourth of Thomas Reuters' business in terms of divisions, but it is not expected to alter the company's overall valuation.

Divestitures can also come about due to necessity. One of the most famous cases of court-ordered divestiture involves the breakup of the Bell System in 1982. The U.S. government determined that Bell controlled too large a portion of the nation's telephone service and brought anti-trust charges in 1974. The divestiture created several new telephone companies, including AT&T and the so-called Baby Bells, as well as new equipment manufacturers.