“Divest” is a common word. “Divestiture” is less familiar, and you may be wondering what it means. Discover the definition of “divestiture,” how to plan and execute different types of corporate divestitures, and the reasons for doing so.
What Is a Divestiture?
The more familiar word “divest” means to get rid of something. It's usually used in the context of investments, in which case it would mean to get rid of investments that are no longer wanted.
“Divestiture” is used when a company decides to get rid of one or more parts of the business operation or other asset. For example, a company may get rid of old equipment to purchase an updated model. It may sell off a subsidiary if the business direction changes and it no longer makes sense to be active in that market sector.
It is easier to understand corporate divestitures by looking at reasons companies choose this strategy. Let's discover some of the more common reasons companies decide to divest themselves of assets, subsidiaries or business units.
Reasons for Divestiture
It would be impossible to cover every reason companies decide to divest themselves of business property. Below are the more common reasons companies give for putting an asset, unit or subsidiary up for sale:
- Shift focus: Companies tend to sell units when they are not profitable to the business operation, when the company needs to shift focus or when the company prefers to focus on the most profitable assets of its business. Any business asset that is underperforming or losing money is a potential target for divestiture, so the company can focus more of its attention on well-performing or core assets.
- Raise funds: When a company needs capital, it can either raise the money itself or seek funding from a third party. Sometimes, companies want to raise funds for a needed purpose without incurring liabilities. In this instance, selling off a business asset or unit can be a good way to raise money for a new objective.
- Overcome financial difficulties: When companies face headwinds, they have strategies they can use to strengthen the business and ensure their survival. Selling off assets or units may allow the business to get out of a bad situation while retaining their integrity. A business may sell itself to a competitor, choosing an M&A over a less preferable option, such as liquidation or bankruptcy.
- Regulatory compliance: In some cases, businesses divest not because they want to, but because they have to. This is the case when a court order or regulatory change requires a business to sell off certain properties.
Types of Divesture Strategies
Businesses that choose to divest have several options for how to do so. Below are common divestment strategy types:
- Sell-off: A company sells the unit, asset or other property to another company. The parent company remains in existence.
- Spin-off: A company separates or spins off one department or unit into a separate company. The parent company remains in existence.
- Split-up: A company splits itself into several smaller companies, and the parent company ceases to exist.
- Carve-Out: The company sells a subsidiary yet retains full control of the carved-out entity. The parent company remains in existence.
- Liquidation: A company sells its assets and property, effectively going out of business. The parent company no longer exists. Any profits from liquidation usually go to satisfy debts.
How to Plan & Execute a Divestiture
Divestiture planning tends to follow a set of steps that take the company from its pre-divestiture existence through the other side of the process.
A first step is a portfolio review. In this phase, the company reviews its entire portfolio with the goal of identifying underperforming units or assets that could be divested. Assets or units that are no longer considered core or underperform the norm are candidates for selling. As a next step, companies will seek to better understand the market price with help from business valuation specialists.
When the company knows what it wants to sell and how much it can expect to receive for the sale, it will begin to seek a buyer. For example, a company that wants to merge with a competitor for survival will look for M&A partners that are interested in expanding their market share through acquiring or merging with another player.
While the company seeks a buyer, it will go through something known as de-integration. De-integration involves explaining to stakeholders what is being sold and why. Staying with the M&A example, de-integration planning helps the company explain to its employees, shareholders and other parties why an M&A is the best choice and how stakeholders will be impacted.
Once a buyer is found, both sides of the deal will need to work together to close the deal. Sticking with the M&A example, companies will perform due diligence to ensure the party is representing itself fairly. They will review financial documentation, balance sheets, intellectual property and other key materials using a secure virtual data room.
With complex deals, both sides will also have an internal team dedicated to bringing the deal to a close in the agreed-upon timeline. Buyer and seller will rely on specialized M&A software to exchange documentation in a secure, encrypted platform.
Assuming everything is in good order, the divestiture will be completed within the agreed upon timeline. The buyer takes ownership of the property, and the seller is paid.
A successful divestiture helps a company rid itself of unwanted assets or units in order to invest in the business. When a deal concludes, the seller has achieved the desired outcome, whether it's capital to fund new business operations or pay off debts, or a streamlined operation that allows the business to focus on core competencies.
To keep deals on track, it helps to have a trusted software partner who can support all phases of the deal, from business valuation to due diligence and the close of the deal. At DFIN, our virtual deal room software supports divestiture types with robust security features, including access control and end-to-end encryption.