Divestiture

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Divestiture, also known as divestment, involves a company selling off assets, business units, or subsidiaries to streamline its operations, improve financial health, and focus on core business areas. This strategy can be driven by various reasons including financial needs, regulatory requirements, or ethical and political considerations. The process can take several forms, such as spin-offs, carve-outs, or liquidations, and aims at enhancing shareholder value while reducing debts and costs.

What is Divestiture?

• The word Divestment or Divestiture under economics and finance means any reduction in some kind of assets to fulfil the financial, ethical or political intent or selling any existing business by a firm.
•  Divestment is reciprocal to an investment. Divestiture talks about the favourable changes and other adjustments of a company’s ownership or business portfolio supposed to create some internal as well as external changes.
• It refers to the disposal of any business unit, either full or partial in nature, through sale, exchange, closure, bankruptcy, etc. It is a common result or decision taken by management to shut down any business operations, as it is not supposed to be part of the organization’s core expertise.
•  It seems to be possible only when any business unit has gone redundant after the result of a merger or acquisition if the disposal of any unit somehow raises the sale of the firm or in case the Hon’ble court itself requires the sale of such business unit to refine and enhance the existing market competition.

Keys Points on Divestiture

• Divestiture is supposed to take place in case the company is ready to sell out its assets, including service, property, or any product line. It enhances generating cash flow within the company, eliminate or end those business that are not suitable according to its objectives, lowers debt, increases shareholder value, etc.
• Usually, when the company grows, many business lines are associated with the same company, therefore using the divestiture process to keep focused on those business lines and remain profit makers.
• This process helps companies cut costs, repay debts, keep the focal point on their primary business and increase shareholder value.

Understanding Divestitures or Divestments

• Divestiture refers to the company’s disposition or selling an asset to manage the portfolio of assets. With business growth, the company finds some business lines attached and closes such lines to keep its focus on those profit-making business lines. Usually, many companies are facing such type of problem. 
• Companies prefer to sell off their business to compete for financial needs lines. Suppose- Any vehicle manufacturing company finds an important prolonged drop in competitiveness within the market. They may sell off their financial division to make payment for developing a new segment of vehicles.
• Divested business units may be spun off into their own companies. Companies are sometimes required to divest their own assets as part of the terms of a merger or acquisition. Even the government can divest some parts of their property or interest, known as privatization, to make money in order to pay off their debts or provide opportunities to the private sector to make profits.
•  This process helps companies cut costs, repay debts, keep the focal point on their primary business and increase shareholder value. Usually, big companies find themselves unstable and face competitive pressures. Uses the divested technique to divest a part of their business.

Divesting Assets

Whenever existing firms or companies opt to go with the divestiture process to sell off or divest their own, parts of some assets have various reasons for doing so. We are giving some common factors for opting for the divestiture method-

Bankruptcy

 Usually, companies are supposed to sell off some parts of their own business at the time of its bankruptcy.

Cutting locations

Suppose a company has so many locations to operate its business. In case the consumers or clients are not ready to visit such locations, the company will be forced to close such business locations or refer to selling out some of its locations. It is common in retail, including banking, insurance, food service, travel, etc.

Selling loss-making assets

Suppose there is less demand beyond the expectation of any company in terms of their products or services in the market, then the company is required to sell it further. Continued production of goods and later selling underperforming assets easily reduce the company’s burden and allow the company to focus on those business segments making/ generating profits.

Political divestiture

Companies can divest some assets due to political or ethical liabilities. Likewise, the movement started to divest companies from fossil fuels, or the movements to divest from geographical regions, which are political controversies, such as Russia and Israel.

Fact

Sometimes, the government itself bound those corporations to divest their assets by making such rules and regulations to eradicate the monopoly of private corporations.

Intension/Motives of Corporations Behind Getting Divestiture

• Corporations opt to divest the process to sell out their business segment beyond their core operations to focus only on those to whom they give their best. For example, Eastman Kodak & Ford Motor Company etc., sell out their different business segments that were not closely linked with their core business operations.
•  To get funds, corporations are very much aware of the fact, and thus, they opt to sell out either of their own business segments to take cash in exchange, etc. Take the example of CSX Corporation, which divested itself to focus on its core business, railroad and obtained the funds to pay out its debts, etc.
• Usually, firms believe their “break up “value will be higher than their own value. This motivates them to sell off assets (what would be worth more during liquidation or when they are retained).
• To get stability within the market, firms generally go through the Divestitures process. For, Philips divested its chip manufacturing division called NXP just because the chip market was volatile and beyond prediction.
• Mainly opts to eliminate or end up those underperforming business segments within a company.
• The government sometimes prefer and demands the Divestiture of companies to balance and create fair competition in the market.

Divestment to Achieve Financial Goals

• Usually, a growing company to increase its finances sector prefers to sell off a business unit or some assets to keep its main focus on market resources to make more profits.
• This may be termed a spin-off. For example, Companies in the USA Divestitures some parts of their assets when it was required to from the end of the Federal Trade Commission prior to a merger with another company being approved. The firm is liable to divest its assets (wholly owned subsidiaries), etc. 

Divestment to Achieve Social Goals

Examples of divestment to achieve social goals are as follows

• Israel disinvestment, a movement by critics of Israel (since the 1920s)
• South Africa’s disinvestment during the era of apartheid (the 1960s-1990s)
• Tobacco industry divestment by the NGO Tobacco-Free Portfolios (since the 2000s)
• Fossil fuel divestment related to global warming by the NGO 350.org (since the 2010s)
• Factory farming and big livestock divestment related to environmental destruction, animal suffering, and human health concerns, by NGO Feedback Global.

Types of Divestiture

The Divestiture is categorized into 5 heads: split off, spin-off, curve out, Trade sale and Liquidation of Assets.

Spin-off Divestiture

It refers to when a company is supposed to separate its subsidiary parts for selling purposes and further convert such parts as their own unit or create such parts as a new company. According to this process, the investors are allowed to take some shares of the newly created company. Spin-off enhances to increase shareholders’ share value rather than making cash profits from it.

• Split-off Divestiture

It is similar in nature to spin-off; here, a new company is created that is not directly governed by its parent company. Here, the shareholders will decide on those shares from the newly created company.

• Carve-out Divestiture

‍ The carve-out process is very complex in nature. It seems to be possible when any existing parent company or seller sell off some parts of their company which is beyond the core business operations of the same company, including the selling of shares by offering IPO and, thus, a new series of investors or shareholders might create. Both the parent and subsidiary companies are two different entities here. Also, just like a spin-off, the parent company opt for the care-out process and often takes interest while promoting the subsidiary.

• Trade Sale Divestiture

Generally, under this process, the seller makes or converts some parts of the business segments, the subsidiary, into a new company. It is very easy, well known and common among experts as this trade sale divestiture is a very quick process, and the money obtained using this technique is subject to taxation law, etc.

• Liquidation of assets Divestiture

To stay out or end any business using this technique is known as liquidation of assets divestiture as it entails the sale of company assets in some parts for the value of assets, etc.

Examples of Divestiture

Most famous examples of Divestiture where companies selected the divestiture process-

• Neste Oil- Finland oil Company Neste Oil changed its name to Neste to get a new focus for its renewable energy in 2015. The company itself divested its assets related to gas and Oil and reinvested the funds acquired further into renewable energy projects, which later resulted in an 8 times hike in their stock prices in five years.
• Microsoft- However, Microsoft is one of the biggest holding blizzards in acquisitions, less than 20 years, with a value of $68 billion. The company once divested its video gaming manufacturers as such was beyond its core business functioning, etc.
• After Russia’s invasion of Ukraine in early 2022, different biggest international investors started to divest assets, including a number of political and economic intentions, such as Norwegian sovereign wealth funds and Oil, etc.
• Meta-Giphy Sale- In 2023, Meta, initially known as Facebook, sold out its animation database, the Giphy, to Shutterstock for $53 million. But Facebook paid a heavy amount in the prior three years, and on sale, they received terms of 83% loss. This was because the United Kingdom regulating authorities demanded Facebook for such sell, as the concerned authority believes that acquiring a gif platform violates the country’s law.

Method of divestment

• Some organizations have access to the advanced featured technologies in order to commute their divestiture process. They usually advertise information about their divesting sectors and mention their intention to sell such divisions on their websites. So that interested firms or organizations can easily reach and approach them to buy their sales divisions. Take the example of Alcoa, which is an establishment organization with various online showrooms. Alcoa has communicated its desire to sell out such divisions and reduced its hotel, travel and meeting expenditures, etc. 
• Divestment or divestiture execution consists of five major complex working streams: governance, tax, carve-out financial statements, information based on the deal, and operational separation.

With the economic liberalization of the Indian economy, the Ministry of Finance itself created a separate department for Divestiture, which will control the disinvestment process and make law accordingly. The list is as follows-

1. Mergers and acquisitions – A merger is the legalized process of consolidating two different businesses into one, while the acquisition is when one entity takes ownership of another in terms of capital share, equity assets, etc. 
2. Corporate spin-off- Commonly known as spin out or start bust, etc., under this, a company splits off a separate part of their business and creates a new one, even if the first one is still active.
3. Consolidation (business) – The term consolidation or amalgamation refers to the merger and acquisition process of various small unit companies into a large one. In the broad sense, related to business understandings, it simply refers to an association of more than two companies in a single new unit. The original organizations will lose their existence and be supplanted by a new entity.
4. Corporate social responsibility- companies joined together and became a part of a community concerned about the social and environmental related to their operations of business and had conversations with stakeholders, too.
5. Demerger- includes a restricting process under the business operations are being separated either more than one component, etc. It’s just a reciprocal to merger or acquisition.
6. Disinvestment- refers to an economic boycott to pressure the government, industry or any company to make changes in their policy, etc.
7.  Fossil fuel divestment- refers to reducing climate changes using social, political and economic pressure for divestments of assets in terms of stocks, bonds, and other financial stocks associated with the same company engaged in extracting fossil fuels, etc.

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