Divestment

Divestment is the opposite of investment. It is applied to maximize the value of the parent company by selling subsidiaries, assets, or investments. Typically, divestitures occur when subsidiary assets or divisions fail to meet expectations.

Some legal and regulatory actions may lead a company to sell assets and conduct a divestment. Companies may also have certain strategic business, financial, social, or political goals that require a divestment strategy.

Understanding Divestment

To increase value, companies come up with divestitures that help to improve efficiency. For example, divestment is used to sell off minor assets in order to focus back on the core business.

A company may conduct a divestment for internal reasons (optimization) or external reasons (reduction of investment and departure of companies from a determined geographic region or industry under the influence of political or social pressure). For example, the pandemic has put a toll on the use of offices and commercial real estate. Many have moved to work remotely using technologies.

A business may sell financial assets, equipment, a division, a subsidiary, a real estate holding or other property. After the sale, the money received is typically used to pay down debt, make large purchases, finance working capital, or pay a special dividend to the company's shareholders. More often than not, divestment occurs at the company's decision, but in some cases, it is a forced action caused by regulatory authorities.

Restructuring and optimization of a business is often accompanied by a divestment. The reason and the initiator of the divestment do not affect the fact that the sale of assets in any case will bring income. This money can be applied to other parts of the organization to improve efficiency. Cases in which a company is forced to sell a profitable asset or division and loses profits are considered exceptional. Usually, political or social measures underlie such situations.

Types of Divestments

The main factor for determining the type of divestment is the sale of assets, which is divided into spin-off, equity carve-out, or direct sale.

Spin-off. This is the distribution of a subsidiary company shares among parent company shareholders. This transaction is cashless and tax-free. Spin-off is very popular for companies with different growth and risk profiles of 2 separate businesses representing 2 independent businesses.

Equity carve-out. This is the public sale of a certain percentage of shares in a subsidiary. The parent company places the shares on the stock market. Typically, this is a tax-free equity carve-out with an equal exchange of cash for shares. The controlling interest in the subsidiary usually remains with the parent company. Companies that need to finance the development possibilities of one of their subsidiaries more often resort to a share buyback strategy. In addition, one of the advantages can be considered the establishment of trading in the shares of subsidiaries, so that the remaining share can be sold later, if possible.

Direct sale. Parent companies can sell entire subsidiaries, their real estate or equipment to a third party. This refers to one more type of divestment - the direct sale of assets. In this case, the assets are usually sold for cash. This can lead the parent company to tax consequences if the assets are sold at a gain. This type of divestment under duress can lead to a "fire sale," where assets are sold for less than their book value.

Major reasons for Divestment

The main reason for divestment can be considered liquidation of inefficient, non-core enterprises. Large companies may have several business units in different areas of industries. It can be difficult to manage such different areas. They can disturb the main direction of the company's activities.

The company may have a non-essential division that can be divested to free up capital and time for the management of the parent company. This will allow the business to focus on its core operations and expertise.

The third reason for the divestment may be the actions of the regulatory authorities. By law, the bankruptcy process often requires the sale of part of the business.

Another reason for divestment can be political and social measures. For example, assets that contribute to global warming are subject to divestment.