Divestiture: Everything You Need to Know
Divestiture is the partial or full discarding of a business unit via sale, exchange, closure, or bankruptcy. 3 min read
Divestiture is the partial or full discarding of a business unit via sale, exchange, closure, or bankruptcy. Generally, divestiture takes places in large corporations that wish to remove certain assets within a subsidiary business group of the corporation, particularly those that are under-performing. Another reason for divestiture is due to the restricting of an organization, in which certain business groups are sold in an effort to increase profits.
Another reason for divestiture could be due to a merger or acquisition at which point there are duplicate departments operating in the same areas. Therefore, since there is no need to have two separate departments working in an identical line of business, one of those business groups is generally sold or closed. Other typical divestiture examples would be when a corporation goes bankrupt and must divest its interest in all business groups operating under the company’s umbrella.
Another popular reason for divestiture is due to regulatory reasons in which legal action may require a corporation to divest due to anticompetitive practices.
Advantages of Divestiture
- Divestiture helps lower operating debts
- It helps increase organizational efficiency
- Some firms can obtain funds, allowing them to pay off other debt and obligations and use their capital in other areas.
- Reduce employment risk
- Enhance shareholder value
Corporate Exit Strategy Options
Such divestitures can take many forms, including strategies-trade sales, spin-offs, or IPOs. When choosing which route is right for your business, you’ll need to consider several factors, including what’s best for the parent company, the actual business being sold, and the market volatility at the time of sale. Oftentimes, companies will pursue multiple routes or even all three routes to take advantage of all available options.
Corporate Exit Strategy- Trade Sale
When a corporation engages in a trade sale, it means that the company is selling a business group to another company in return for stock and cash. Generally, a trade sale takes place via an auction to facilitate bidding.
Corporate Exit Strategy- Spin Off
A spin-off involves creating a new business from an existing part of the company. The newly identified shares are distributed to the company’s shareholders, which could benefit them for tax purposes since cash is not involved in the transaction.
Corporate Exit Strategy- IPO
An IPO, also referred to as an initial public offering or equity carve-out, is a process whereby the former parent company or the new company sells part of its business to public shareholders but continues to have some degree of interest in the company.
Principles of Great Divesting
- Have a long-term portfolio drafted to ensure that objectives remain in place for the short and long-term.
- Be aware of the value of the asset. How much is your company worth? What is the market currently like?
- Be able to speak to your company’s strengths; this will help when new companies or investors come along and wish to purchase part of your business.
- Work with strong buyers—make sure that they are serious about the transaction and not just wasting your time.
- Sell when the time is right. Take a look at the market before choosing to do the legwork and find buyers. You’ll want to sell when it is most advantageous for you.
- Make sure that the divestiture is done properly and methodically.
- Communicate well with all stakeholders in your company; this includes shareholders, employees, the board of directors, legal counsel, and any other important parties. Also keep them informed of the divestiture process, so that any employees working for the particular business group that is going to be sold know when they will need to begin looking for another job or looking to move within the company to another business group.
Examples of Divestiture
- Thompson Reuters, a media and information company, sold its intellectual property and sciences division in 2016. The sole purpose here was to decrease the amount of leverage on its balance sheet.
- In 1982, the Bell System was forced into divestiture by the U.S. government, having concluded that the company controlled a sizeable fraction of the nation’s telephone service; therefore, anti-trust charges were brought against the company. This ultimately resulted in the creation of many new telephone companies, including AT&T.
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