Divestiture

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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. 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.

BREAKING DOWN '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.

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