What Is a Divestiture?
Let me explain divestiture directly: it's the partial or full disposal of a company or entity's operations or assets through sale, exchange, closure, or bankruptcy. You'll see this most often when management decides to stop running a business unit because it doesn't fit the core competency of the company.
This can also happen if a unit becomes redundant after a merger or acquisition, if selling it boosts the firm's overall value, or if a court orders the sale to promote market competition.
Key Takeaways
Here's what you need to know: a divestiture occurs when a company or government gets rid of all or some assets via sale, exchange, closure, or bankruptcy. As companies expand, they might get tangled in too many business lines, and divestiture helps them stay focused and profitable.
Through divestiture, companies can reduce costs, pay off debts, concentrate on core businesses, and increase shareholder value. Sometimes, it's forced due to bankruptcy or to address competition issues.
Understanding Divestitures
Technically, divesting any asset—like intellectual property, real estate, or machinery—counts as a divestiture, but I usually hear the term applied to larger business units. Why would a company do this? There are several reasons, and it's not always by choice.
As a company grows, it might end up in too many business areas and need to shut down some to focus on profitable ones—this is common with conglomerates. If a company is in financial trouble, like an automaker facing declining sales, it might sell a division such as financing to fund new developments.
Divested units can even be spun off into standalone companies. On the forced side, bankruptcy or competition laws might require it; regulators could demand a sale before approving a merger to avoid excessive market share.
By divesting, you can cut costs, repay debt, reinvest, streamline operations, and ultimately enhance shareholder value. Governments do this too, through privatization, to raise funds or let the private sector take over.
Why Companies Divest Assets
- Bankruptcy: Companies in bankruptcy must sell parts of the business.
- Cutting back on locations: If there are too many underperforming sites, especially in retail, they get closed or sold.
- Selling losing assets: Weak demand for a product means it's better to divest and redirect resources to stronger areas for better ROI.
- Raise funds: To invest, expand, or pay debts and fines, selling assets can provide cash when other options aren't viable.
- Political divestiture: Due to ethical or political pressures, like divesting from fossil fuels or controversial regions such as Israel or Russia.
- To comply with regulators: To prevent monopolies, governments may force asset sales, especially in mergers.
Examples of Divestitures
Divestitures take various forms, from sales to improve finances to those mandated by antitrust violations. Take Meta's sale of Giphy in 2023: they sold it to Shutterstock for $53 million, an 83% loss from what they paid three years prior, forced by U.K. regulators who saw it as an antitrust issue.
Then there's Kellogg's 2022 split into three companies, spinning off cereal and plant-based foods to focus on high-revenue frozen breakfast and snacks.
Why Are Companies Divesting From Israel?
Since 2002, campaigns like those led by Desmond Tutu have pushed for divestment from Israel over issues in the West Bank and Palestinian territories. This has ramped up with the Israel-Hamas War starting in October 2023, with activists claiming institutions are pulling investments and businesses in Israel are suffering economically.
What Happens to Employees in a Divestiture?
In a divestiture, overlapping employees might need reassigning—some go to the new entity, others stay with the parent. If it's acquired by another company, layoffs could occur. Transparency from management is key here.
What Led to the AT&T Divestiture in 1982?
The 1982 AT&T breakup is a classic court-ordered case. The U.S. government sued in 1974 for antitrust violations due to AT&T's dominance in telephone services, resulting in seven new companies, including one keeping the AT&T name, plus equipment manufacturers.
The Bottom Line
To wrap this up, divestiture is when a company sells or spins off part of its business to focus on core strengths, raise cash, or cut losses from underperforming segments. It can also be required by regulators to avoid market dominance.
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