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.