What is Divestment?
Divestment, also referred to as “divestiture,” is the act of selling off or closing down one or more of a business’s operational assets. This could involve subsidiaries, business segments, or even non-core assets. Divestment is usually executed to streamline operations, realize the value of an asset, or reallocate capital toward more profitable or strategic ventures. In essence, it stands as the opposite of an investment.
Key Aspects of Divestment:
- Asset Realization: The process of turning assets into cash or other forms of liquid value.
- Operational Adjustments: Closing down certain segments of a business that are no longer profitable or strategically relevant.
- Strategic Reallocation: Redirecting capital and resources to more promising or core business areas.
Examples of Divestment
- General Electric (GE): GE divested its financial services business, GE Capital, to focus more on its industrial operations like aviation and healthcare.
- DowDuPont: After the merger of Dow Chemical and DuPont, the company engaged in various divestments to separate into three distinct entities focusing on agriculture, materials science, and specialty products.
- Microsoft: In 2020, Microsoft divested its Mixer streaming service to Facebook Gaming, redirecting its focus toward its core gaming segment through Xbox.
Frequently Asked Questions (FAQs) About Divestment
What is the main purpose of divestment?
Divestment enables a company to focus on its core activities, improve financial health, and allocate resources more effectively by selling off non-core or underperforming assets.
Does divestment always involve selling to external entities?
Not necessarily. While divestment often involves selling to third parties, it can also entail transferring the assets to a different subsidiary within the same parent company or shutting down the operation entirely.
How does divestment affect the stock price of a company?
Divestment can positively affect the stock price if investors perceive the action as a move to streamline operations and focus on profitable segments. Conversely, if the divestiture indicates financial trouble, it could negatively impact the stock price.
Is divestment limited to physical assets?
No, divestment is not limited to physical assets. It also includes intellectual property, shares, and divisions of the company.
What are some non-financial reasons for divestment?
Non-financial reasons could include regulatory requirements, ethical reasons (such as divestment from controversial industries like fossil fuels or tobacco), and achieving corporate governance goals.
Related Terms
- Investment: The process of allocating resources, usually money, in expectation of generating income or profit.
- Acquisition: The act of obtaining ownership or control of another company or its assets.
- Asset Management: The professional management of various securities and assets to meet specified investment goals for investors.
- Subsidiary: A company that is controlled by another company, known as a parent or holding company.
- Corporate Strategy: The overall scope and direction of a corporation and the way in which its various business operations work together to achieve particular goals.
Online References
- Investopedia on Divestment
- Harvard Business Review on Corporate Strategy
- The Wall Street Journal – Business Divestments
Suggested Books for Further Studies
- “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company Inc.
- “Corporate Finance” by Stephen A. Ross and Randolph W. Westerfield
- “Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions” by Donald DePamphilis
- “Divestitures: Creating Value Through Strategy, Structure, and Implementation” by Emilie R. Feldman and Harbir Singh
Accounting Basics: “Divestment” Fundamentals Quiz
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