In
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
and
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, divestment or divestiture is the reduction of some kind of
asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
. Divestiture is an adaptive change and adjustment of a company's ownership and business portfolio made to confront with internal and external changes.
Motives
Firms may have several motives for divestitures:
# 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
The Eastman Kodak Company (referred to simply as Kodak ) is an American public company that produces various products related to its historic basis in analogue photography. The company is headquartered in Rochester, New York, and is incorpor ...
,
Ford Motor Company
Ford Motor Company (commonly known as Ford) is an American multinational automobile manufacturer headquartered in Dearborn, Michigan, United States. It was founded by Henry Ford and incorporated on June 16, 1903. The company sells automobi ...
,
Future Group
Future Group is an Indian conglomerate, founded by Kishore Biyani and based in Mumbai. The company is known in Indian retail and fashion sectors, operating supermarket chains Big Bazaar and Food Bazaar, lifestyle stores Brand Factory and Centra ...
and many other firms have sold various businesses that were not closely related to their core businesses.
# 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 is an American holding company focused on rail transportation and real estate in North America, among other industries. The company was established in 1980 as part of the Chessie System and Seaboard Coast Line Industries merger. T ...
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 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.
# divesting a part of a firm may enhance stability.
Philips
Koninklijke Philips N.V. (), commonly shortened to Philips, is a Dutch multinational conglomerate corporation that was founded in Eindhoven in 1891. Since 1997, it has been mostly headquartered in Amsterdam, though the Benelux headquarters i ...
, for example, divested its chip division -
NXP
NXP Semiconductors N.V. (NXP) is a Dutch semiconductor designer and manufacturer with headquarters in Eindhoven, Netherlands. The company employs approximately 31,000 people in more than 30 countries. NXP reported revenue of $11.06 billion in 2 ...
- 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.
# divesting a part of a company may eliminate a division which is under-performing or even failing.
# regulatory authorities may demand divestiture, for example in order to create competition.
# pressure from shareholders for social reasons (sometimes also called
disinvestment
Disinvestment refers to the use of a concerted economic boycott to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in ...
). Examples include
disinvestment from South Africa
Disinvestment (or divestment) from South Africa was first advocated in the 1960s, in protest against South Africa's system of apartheid, but was not implemented on a significant scale until the mid-1980s. The disinvestment campaign, after bein ...
in the former era of
apartheid
Apartheid (, especially South African English: , ; , "aparthood") was a system of institutionalised racial segregation that existed in South Africa and South West Africa (now Namibia) from 1948 to the early 1990s. Apartheid was ...
(now ended),
disinvestment from Israel
Disinvestment from Israel is a campaign conducted by religious and political entities which aims to use disinvestment to pressure the government of Israel to put "an end to the Israeli occupation of Palestinian territories captured during the 1967 ...
due to the
occupation of the Palestinian territories
The Palestinian territories are the two regions of the former British Mandate for Palestine that have been militarily occupied by Israel since the Six-Day War of 1967, namely: the West Bank (including East Jerusalem) and the Gaza Strip. The In ...
,
disinvestment from Russia due to the
2022 Russian invasion of Ukraine
On 24 February 2022, in a major escalation of the Russo-Ukrainian War, which began in 2014. The invasion has resulted in tens of thousands of deaths on both sides. It has caused Europe's largest refugee crisis since World War II. An ...
and calls for
fossil fuel divestment
Fossil fuel divestment or fossil fuel divestment and investment in climate solutions is an attempt to reduce climate change by exerting social, political, and economic pressure for the institutional divestment of assets including stocks, bonds ...
in response to
climate change
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to E ...
.
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
Spin-off may refer to:
*Spin-off (media), a media work derived from an existing work
*Corporate spin-off, a type of corporate action that forms a new company or entity
* Government spin-off, civilian goods which are the result of military or gove ...
. In the United States, divestment of certain parts of a company can occur when required by the
Federal Trade Commission
The Federal Trade Commission (FTC) is an independent agency of the United States government whose principal mission is the enforcement of civil (non-criminal) antitrust law and the promotion of consumer protection. The FTC shares jurisdiction ov ...
before a merger with another firm is approved. A company can divest assets to wholly owned subsidiaries.
It is a process of selling an asset.
The largest corporate divestiture in history was the 1984
U.S. Department of Justice
The United States Department of Justice (DOJ), also known as the Justice Department, is a federal executive department of the United States government tasked with the enforcement of federal law and administration of justice in the United State ...
-mandated
breakup of the Bell System
The breakup of the Bell System was mandated on January 8, 1982, by an agreed consent decree providing that AT&T Corporation would, as had been initially proposed by AT&T, relinquish control of the Bell Operating Companies, which had provided loc ...
into
AT&T
AT&T Inc. is an American multinational telecommunications holding company headquartered at Whitacre Tower in Downtown Dallas, Texas. It is the world's largest telecommunications company by revenue and the third largest provider of mobile tel ...
and the seven
Baby Bell
The Regional Bell Operating Companies (RBOC) are the result of '' United States v. AT&T'', the U.S. Department of Justice antitrust suit against the former American Telephone & Telegraph Company (later known as AT&T Corp.). On January 8, 19 ...
s.
Of the 1000 largest global companies, those that are actively involved in both acquiring and divesting create as much as 1.5 to 4.7 percentage points higher shareholder returns than those primarily focused on acquisitions.
Divestment for social goals
Examples of divestment for social goals include:
*
Disinvestment from Israel
Disinvestment from Israel is a campaign conducted by religious and political entities which aims to use disinvestment to pressure the government of Israel to put "an end to the Israeli occupation of Palestinian territories captured during the 1967 ...
, a movement by
critics of Israel (since 1920s)
*
Disinvestment from South Africa
Disinvestment (or divestment) from South Africa was first advocated in the 1960s, in protest against South Africa's system of apartheid, but was not implemented on a significant scale until the mid-1980s. The disinvestment campaign, after bein ...
in the former era of
apartheid
Apartheid (, especially South African English: , ; , "aparthood") was a system of institutionalised racial segregation that existed in South Africa and South West Africa (now Namibia) from 1948 to the early 1990s. Apartheid was ...
(1960s-1990s)
*
Tobacco industry
The tobacco industry comprises those persons and companies who are engaged in the growth, preparation for sale, shipment, advertisement, and distribution of tobacco and tobacco-related products. It is a global industry; tobacco can grow in any ...
divestment, coordinated by the NGO Tobacco-Free Portfolios (since 2000s)
*
Fossil fuel divestment
Fossil fuel divestment or fossil fuel divestment and investment in climate solutions is an attempt to reduce climate change by exerting social, political, and economic pressure for the institutional divestment of assets including stocks, bonds ...
in response to
global warming
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to E ...
, coordinated by the NGO
350.org
350.org is an international environmental organization addressing the climate crisis. Its stated goal is to end the use of fossil fuels and transition to renewable energy by building a global, grassroots movement.
The 350 in the name stands fo ...
(since 2010s)
*
Factory farming
Intensive animal farming or industrial livestock production, also known by its opponents as factory farming and macro-farms, is a type of intensive agriculture, specifically an approach to animal husbandry designed to maximize production, while ...
divestment and big livestock divestment in response to environmental destruction, animal suffering, and human health concerns, coordinated by NGO Feedback Global.
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.
Firms use transitional service agreements to increase the strategic benefits of divestitures.
Divestment execution includes five critical work streams: governance, tax, carve-out financial statements, deal-basis information, and operational separation. Companies often create cross-disciplined teams composed of IT, HR, legal, tax, and other key business units, to implement a business separation.
With
economic liberalization
Economic liberalization (or economic liberalisation) is the lessening of government regulations and restrictions in an economy in exchange for greater participation by private entities. In politics, the doctrine is associated with classical liber ...
of the
Indian economy
The economy of India has transitioned from a mixed planned economy to a mixed middle-income developing social market economy with notable state participation in strategic sectors.
*
*
*
* It is the world's fifth-largest economy by nomina ...
, India's
Ministry of Finance A ministry of finance is a part of the government in most countries that is responsible for matters related to the finance.
Lists of current ministries of finance
Named "Ministry"
* Ministry of Finance (Afghanistan)
* Ministry of Finance and Eco ...
set up a separate
Department of Disinvestments.
See also
*
Mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
*
Corporate spin-off
A corporate spin-off, also known as a spin-out, or starburst or hive-off, is a type of corporate action where a company "splits off" a section as a separate business or creates a second incarnation, even if the first is still active.
Characte ...
*
Consolidation (business)
In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, ''consolidation'' refers to the aggregation of financial statements of a gro ...
*
Corporate social responsibility
Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethicall ...
*
Demerger
A demerger is a form of corporate restructuring in which the entity's business operations are segregated into one or more components. It is the converse of a merger or acquisition.
A demerger can take place through a spin-off by distributed or ...
*
Disinvestment
Disinvestment refers to the use of a concerted economic boycott to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in ...
*
Fossil fuel divestment
Fossil fuel divestment or fossil fuel divestment and investment in climate solutions is an attempt to reduce climate change by exerting social, political, and economic pressure for the institutional divestment of assets including stocks, bonds ...
*
Financial economics
Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade".William F. Sharpe"Financial ...
*
Tax resistance
Tax resistance is the refusal to pay tax because of opposition to the government that is imposing the tax, or to government policy, or as opposition to taxation in itself. Tax resistance is a form of direct action and, if in violation of the tax ...
*
Socially responsible investing
Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social ...
*
Stranded asset
Stranded assets are "assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities". Stranded assets can be caused by a variety of factors and are a phenomenon inherent in the 'creative destructi ...
References
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