Divestment

Divestment
This article is about the business concept. For other uses, see Disinvestment and Divestment campaign.
Finance
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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.

Contents

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, 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.

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 Commission 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.

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.

References

  • Jeff Madura (2007). Introduction to Business, Fourth Edition. USA: Thomson South-Western. ISBN 0-324-36079-7. 

External links

See also

v · d · eCorporate finance and investment banking
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  • Divestment — Di*vest ment, n. The act of divesting. [R.] [1913 Webster] …   The Collaborative International Dictionary of English

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  • Divestment — The process of selling an asset. Also known as divestiture, it is made for either financial or social goals. Divestment is the opposite of investment. Generally you d just say that you are selling an asset. The term divestment is more appropriate …   Investment dictionary

  • divestment — UK [daɪˈvestmənt] / US noun [countable/uncountable] Word forms divestment : singular divestment plural divestments economics the process of selling shares or assets or of taking back money that you have invested …   English dictionary

  • divestment — In property law, the cutting short of an interest prior to its normal termination. Restatement, Second, Property, No. 16. The complete loss of an interest in land (total divestment) or the partial loss of it by virtue of others sharing it… …   Black's law dictionary

  • divestment — In property law, the cutting short of an interest prior to its normal termination. Restatement, Second, Property, No. 16. The complete loss of an interest in land (total divestment) or the partial loss of it by virtue of others sharing it… …   Black's law dictionary

  • divestment — (New American Roget s College Thesaurus) Stripping of covering Nouns 1. divestment, divestiture; taking off, disrobing, undressing; [de]nudation; decortication, hair removal, depilation, excoriation, desquamation; molting, ecdysis; exfoliation.… …   English dictionary for students

  • divestment — noun see divest …   New Collegiate Dictionary

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