- This article is about the business concept. For other uses, see Disinvestment and Divestment campaign.
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In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.
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Motives [edit]
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, Future Group 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.
A seventh reason is pressure from shareholders for social reasons (sometimes also called Disinvestment). Historical example: there was a movement to divest from companies who dealt with apartheid South Africa, see Disinvestment from South Africa. Current example: divestment from fossil fuels (similar to boycott)
Divestment for financial goals [edit]
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 [edit]
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.
See also [edit]
- Consolidation (business)
- Corporate social responsibility
- Demerger
- Divestment campaign
- Financial economics
- Tax resistance
References [edit]
- Jeff Madura (2007). Introduction to Business, Fourth Edition. USA: Thomson South-Western. ISBN 0-324-36079-7.
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