Divestment
Encyclopedia
In finance
and economics
, divestment or divestiture is the reduction of some kind of asset
for either financial or ethical objectives or sale of an existing business by a firm. A divestment is the opposite of an investment
.
First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak
, Ford Motor Company
, and many other firms have sold various businesses that were not closely related to their core businesses.
A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation
made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.
A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
A fourth motive to divest a part of a firm may be to create stability. Philips
, for example, divested its chip division called NXP because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.
A fifth motive for firms to divest a part of the company is that a division is under-performing or even failing.
A sixth reason to divest could be forced on to the firm by the regulatory authorities, for example in order to create competition.
before a merger with another firm is approved. A company can divest assets to wholly owned subsidiaries.
The largest, and likely most famous, corporate divestiture in history was the 1984 U.S. Department of Justice-mandated breakup of the Bell System
into AT&T
and the seven Baby Bells.
With Economic liberalization of the Indian economy, Ministry of Finance of India had set up a separate Department of Disinvestments.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
and economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, divestment or divestiture is the reduction of some kind of asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
for either financial or ethical objectives or sale of an existing business by a firm. A divestment is the opposite of an investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
.
Motives
Firms may have several motives for divestitures.First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak
Eastman Kodak
Eastman Kodak Company is a multinational imaging and photographic equipment, materials and services company headquarted in Rochester, New York, United States. It was founded by George Eastman in 1892....
, Ford Motor Company
Ford Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
, and many other firms have sold various businesses that were not closely related to their core businesses.
A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation
CSX Corporation
CSX Corporation was formed in 1980 by the merger of Chessie System and Seaboard Coast Line Industries and eventually merged the various railroads owned by those predecessors into a single line that became known as CSX Transportation. Based in Richmond, Virginia, USA after the merger, in 2003...
made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.
A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
A fourth motive to divest a part of a firm may be to create stability. Philips
Philips
Koninklijke Philips Electronics N.V. , more commonly known as Philips, is a multinational Dutch electronics company....
, for example, divested its chip division called NXP because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.
A fifth motive for firms to divest a part of the company is that a division is under-performing or even failing.
A sixth reason to divest could be forced on to the firm by the regulatory authorities, for example in order to create competition.
Divestment for financial goals
Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. Sometimes, such an action can be a spin-off. (For the United States); Divestment of certain parts of a company can occur when required by the Federal Trade CommissionFederal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
before a merger with another firm is approved. A company can divest assets to wholly owned subsidiaries.
The largest, and likely most famous, corporate divestiture in history was the 1984 U.S. Department of Justice-mandated breakup of the Bell System
Bell System
The Bell System was the American Bell Telephone Company and then, subsequently, AT&T led system which provided telephone services to much of the United States and Canada from 1877 to 1984, at various times as a monopoly. In 1984, the company was broken up into separate companies, by a U.S...
into AT&T
AT&T
AT&T Inc. is an American multinational telecommunications corporation headquartered in Whitacre Tower, Dallas, Texas, United States. It is the largest provider of mobile telephony and fixed telephony in the United States, and is also a provider of broadband and subscription television services...
and the seven Baby Bells.
Method of divestment
Some firms are using technology to facilitate the process of divesting some divisions. They post the information about any division that they wish to sell on their website so that it is available to any firm that may be interested in buying the division. For example, Alcoa has established an online showroom of the divisions that are for sale. By communicating the information online, Alcoa has reduced its hotel, travel, and meeting expenses.With Economic liberalization of the Indian economy, Ministry of Finance of India had set up a separate Department of Disinvestments.
External links
- Institute of Mergers, Acquisitions and Alliances (MANDA) M&A - Ans academic research institute on mergers & acquisitions, incl. divestments
See also
- Consolidation (business)Consolidation (business)Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group...
- Corporate social responsibilityCorporate social responsibilityCorporate social responsibility is a form of corporate self-regulation integrated into a business model...
- DemergerDemergerDemerger is a form of corporate restructuring in which the an entity's business operations are segregated into one or more components. It is the converse of a merger or acquisition....
- Divestment campaign
- Financial economicsFinancial economicsFinancial Economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment"....
- Tax resistanceTax resistanceTax resistance is the refusal to pay tax because of opposition to the government that is imposing the tax or to government policy.Tax resistance is a form of civil disobedience and direct action...