Loading the player...

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.

RELATED TERMS
  1. Taxable Spinoff

    A taxable spinoff is a divestiture of a subsidiary or division ...
  2. Asset Rationalization

    Asset rationalization is the process of reorganizing a firm's ...
  3. Carve-Out

    A carve-out is the partial divestiture of a business unit.
  4. Unit Sales

    Unit sales are a measure of the total sales that a firm earns ...
  5. Organic Sales

    Organic sales are revenues generated from the firm's existing ...
  6. Barriers to Exit

    Barriers to exit are obstacles or impediments that prevent a ...
Related Articles
  1. Tech

    Cisco: Guidance Disappoints, Stock Falls (CSCO)

    Despite posting an earnings and revenue surprise in fiscal Q1, investors are placing more emphasis on the firm's negative guidance for the current quarter.
  2. Investing

    Is Big Pharma Under Pressure in 2016? (JNJ, GSK)

    Find out why large pharmaceutical companies are coming under pressure by investors to break themselves up into smaller companies.
  3. Small Business

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  4. Investing

    First Data Posts Q4 Earnings Beat

    The Atlanta-based fintech leader turned last year's $1.2 billion loss to a profit in Q4.
  5. Investing

    T-Mobile, Sprint to Merge Without Asset Sale

    T-Mobile and Sprint are gearing up to finally announce a merger that won't include any asset sales.
  6. Managing Wealth

    How to sell stock in your company

    Read about options and important steps to consider when you're selling, even a small part of your business.
  7. Investing

    Procter & Gamble: Getting Back to Basics (PG)

    From aggressive expansion to a renewed focus. How will this impact investors?
  8. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  9. Investing

    Tyco Split Set For 2012

    2012 will see Tyco split into another three separate companies.
  10. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
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. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
  3. How is minimum transfer price calculated?

    Discover how to calculate the minimum transfer price for goods and materials that have been transferred between multiple ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center