What is 'Divestment'

Divestment, also known as divestiture, is the opposite of an investment, and it is the process of selling an asset for either financial, social or political goals. Assets that can be divested include a subsidiary, business department, real estate, equipment and other property. Divestment can be part of following either a corporate optimization strategy or political agenda, when investments are reduced and firms withdraw from a particular geographic region or industry due to political or social pressure.

BREAKING DOWN 'Divestment'

Divestment involves a company selling its assets to improve its value and obtain higher efficiency. Many companies use divestment to sell off peripheral assets that enable their management teams to regain better focus on the core business. Proceeds from divestment are typically used to pay down debt, make capital expenditures, fund working capital, or pay a special dividend to a company's shareholders. While most divestment transactions are deliberate efforts, selling assets in some cases could be forced due to regulatory action.

Types of Divestments

Divestment typically takes a form of spin-off, equity carve-out or direct sale of assets. Spin-offs are non-cash and tax-free transactions, when a parent company distributes shares of its subsidiary to its shareholders. Thus, the subsidiary becomes a standalone company whose shares can be traded on a stock exchange. Spin-offs are most common among companies that consist of two separate businesses that have different growth or risk profiles.

Under the equity carve-out scenario, a parent company sells a certain percentage of equity in its subsidiary to the public through a stock market. Equity carve-outs are tax-free transactions that involve exchange of cash for shares. Because the parent company typically retains the controlling stake in the subsidiary, equity carve-outs are most common among companies that need to finance growth opportunities for one of their subsidiaries. Also, equity carve-outs allow companies to establish trading avenues for their subsidiaries' shares, and later dispose the remaining stake under proper circumstances.

A direct sale of assets, including the entire subsidiaries, is another popular form of divestment. In this case, a parent company sells assets, such as real estate, equipment or the entire subsidiary, to another party. The sale of assets typically involves cash and may trigger tax consequences for a parent company if assets are sold at a gain.

Major Reasons for Divestment

The most common reason for divestment is the selling of non-core businesses. Companies may own different business units that operate in different industries that can be very distracting for their management teams. Divesting a nonessential business unit can free up time for a parent company's management to focus on its core operations and competencies. For instance, in 2014, General Electric made a decision to divest its non-core financing arm by selling shares of Synchrony Financial on the New York Stock Exchange. Additionally, companies divest their assets to obtain funds, shed an underperforming subsidiary, respond to regulatory action and realize value through a break-up. Finally, companies may engage in divestment for political and social reasons, such as selling assets contributing to global warming.

RELATED TERMS
  1. Carve-Out

    The partial divestiture of a business unit. A company undertaking ...
  2. Taxable Spinoff

    A divestiture of a subsidiary or division by a publicly traded ...
  3. Subsidiary

    A company whose voting stock is more than 50% controlled by another ...
  4. Wholly Owned Subsidiary

    A company whose common stock is 100% owned by another company, ...
  5. Parent Company

    A company that controls other companies by owning an influential ...
  6. Downstream Guarantee

    A guarantee placed on a loan on behalf of the borrowing party ...
Related Articles
  1. Investing

    Comparing Spin-offs, Split-Offs and Carve-Outs

    Spin-offs, split-offs and carve-outs are three methods a company can use to divest certain assets, a division or a subsidiary. Here's how they differ.
  2. Insights

    Protest Divestment And The End Of Apartheid

    Can selling stock really change the world? If you sell enough of it, it can.
  3. Investing

    Solutions For Concentrated Positions

    Investopedia explains various tactics for divesting your overexposure to any one stock.
  4. Small Business

    What's a Subsidiary?

    A subsidiary is a corporation owned 50% or more by another corporation. The owning corporation is usually called the parent or holding company. A company that is 100% owned and controlled by ...
  5. Small Business

    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 ...
  6. Small Business

    What is a Wholly Owned Subsidiary?

    A company whose common stock is 100% owned by another company, called the parent company.
  7. Investing

    What is a Spinoff?

    Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs.
  8. Small Business

    What Happens in a Carve-Out?

    A carve-out happens when a corporation isolates part of its business and shares those profits with a third party.
  9. Small Business

    Explaining Affiliate, Associate And Subsidiary

    Affiliate, associate and subsidiary are all terms referring to the degree of ownership a parent company holds in another company.
  10. Taxes

    What's a Holding Company?

    A holding company is a corporation that owns enough voting stock in another company to control its management and policies.
RELATED FAQS
  1. What are the tax implications for both the company and investors in a divestiture ...

    Learn the tax implications for a company and its investors in divestiture events, such as spinoffs, equity carve-outs, and ... Read Answer >>
  2. What are some of the more common reasons divestiture occurs?

    Learn about common reasons why companies choose to conduct divestitures of their assets, and review relevant examples for ... Read Answer >>
  3. How is taxation treated for both the parent and subsidiary company during a spinoff?

    Learn how the potential tax implications of a spinoff can affect both parent and subsidiary companies and how taxes may be ... Read Answer >>
  4. How do spinoffs impact investors in the both the parent and subsidiary companies?

    Learn about how spinoffs affect investors in both the parent company and the subsidiary and what strategies investors use ... Read Answer >>
  5. What is the difference between a subsidiary and a wholly owned subsidiary?

    Understand the primary differences between a subsidiary company and a wholly owned subsidiary, and their relationship to ... Read Answer >>
  6. Are domestic and foreign subsidiaries included on a company's financial statements?

    A subsidiary is a company that is controlled by another 'parent' company. The subsidiary acts and operates like its own entity ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center