Divestiture

AAA

DEFINITION of 'Divestiture'

The partial or full disposal of a business unit through sale, exchange, closure or bankruptcy. Divestiture may result from a management decision to no longer operate a business unit because it is not part of a core competency. It may also occur if a business unit is deemed redundant after a merger or acquisition, if jettisoning a unit increases the resale value of the firm or if a court requires the sale of a business unit to improve market competition.

INVESTOPEDIA EXPLAINS 'Divestiture'

Divestitures are a way for a company to manage its portfolio of assets. As companies grow they may find they are trying to focus on too many lines of business, and that they must close some operational business units in order to focus on more profitable lines. This is a problem that conglomerates may face. 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 in order to pay for the development of a new line of vehicles.

One of the most famous cases of court-ordered divestiture involves the breakup of the Bell System in 1982. The United States government determined that Bell controlled too large a portion of telephone service, and brought anti-trust charges in 1974. The divestiture created several new telephone companies, including AT&T and the “Baby Bells” as well as new equipment manufacturers.

Business units that are divested may be spun off into their own companies rather than shuttered. 

VIDEO

Loading the player...
RELATED TERMS
  1. Asset Rationalization

    Reorganizing a firm's assets in order to improve operating efficiencies ...
  2. Discontinued Operations

    A segment of a company's business that has been sold, disposed ...
  3. Conglomerate

    A corporation that is made up of a number of different, seemingly ...
  4. Carve-Out

    The partial divestiture of a business unit. A company undertaking ...
  5. Mergers And Acquisitions - M&A

    A general term used to refer to the consolidation of companies. ...
  6. Spinoff

    The creation of an independent company through the sale or distribution ...
RELATED FAQS
  1. What are some common cash-debt strategies that occur during a spinoff?

    Cash-debt strategies that are commonly used to in a spinoff to enable the parent company to monetize the spinoff are debt/equity ... Read Full Answer >>
  2. What are the tax implications for both the company and investors in a divestiture ...

    In finance, divestiture is defined as a reduction of a company's assets as a result of asset closures or the selling of business ... Read Full Answer >>
  3. How can a divestiture help a company?

    In finance, the divestiture, or divestment, represents a reduction of an asset or its sale to another company mainly for ... Read Full Answer >>
  4. What is the outlook for mergers and acquisitions in the utilities sector?

    Mergers and acquisitions (M&A) in the utilities sector will likely continue at a brisk pace for the foreseeable future, ... Read Full Answer >>
  5. What is the purpose of liquidation?

    Liquidation is an important process in a market economy for several reasons. It completes the enforcement of legal contracts; ... Read Full Answer >>
  6. What are some of the more common reasons divestiture occurs?

    In finance, divestment or divestiture is defined as disposing of an asset through sale, exchange or closure. A divestiture ... Read Full Answer >>
  7. How does a nation transition from a socialist economy to a free market economy

    A nation needs to privatize the means of production to transition from socialism to free markets. In a socialist economy, ... Read Full Answer >>
Related Articles
  1. Investing

    What's a Divestiture?

    Divestiture is when a company, government or other organization sells, shuts down or otherwise eliminates a division or operating unit. Divestitures happen for many reasons. Management may decide ...
  2. Investing Basics

    Analyzing An Acquisition Announcement

    These deals can make or break investors' returns. Find out how to tell the difference.
  3. Bonds & Fixed Income

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  4. Fundamental Analysis

    Accretion / Dilution Analysis: A Merger Mystery

    This analysis tool is an effective way to value mergers and acquisitions. The deal's on the table, but should you sign the papers?
  5. Options & Futures

    Reverse Mergers: The Pros And Cons

    Reverse mergers can provide excellent opportunities for companies and investors, but there are still some downsides and risks.
  6. Investing

    The Art Of Selling A Losing Position

    Knowing whether to sell or to hold is tough. And no rule fits all. Find out what to consider.
  7. Options & Futures

    Parents And Spinoffs: When To Buy And When To Sell

    Spinoffs can create great investing opportunities, but there's a time to stick around and a time to jump ship.
  8. Insurance

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  9. Investing

    Use Breakup Value To Find Undervalued Companies

    Find out a company's worth if it were sold in pieces - it may be more than you think.
  10. Investing

    Mergers Put Money In Shareholders' Pockets

    Learn the five ways mergers and acquisitions can increase a company's value.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!