Divestiture

Accretion

What is an assignment?

An assignment is the partial or total assignment of a business unit by sale, exchange, closure or bankruptcy. Divestment most often results from management’s decision to stop operating a business unit because it is not part of a core competency.

Divestment can also occur if a business unit is considered redundant after a merger or acquisition, if the disposal of a unit increases the resale value of the business, or if a court requires the sale of a business unit to improve competition in the market.

Understanding divestitures

In its simplest form, an assignment is the assignment or sale of an asset by a business. Disposals are essentially a way for a business to manage its asset portfolio. As businesses grow, they may find that they are trying to focus on too many industries and they have to close certain business units to focus on more profitable lines. Many conglomerates face this problem.

Companies can also sell their activities if they are under financial constraints. For example, a car manufacturer that sees a significant and prolonged decline in competitiveness may sell its finance division to pay for the development of a new range of vehicles.

The divested business units may be dissociated from their own companies rather than closed in the event of bankruptcy or a similar result. Companies may be required to sell part of their assets under the conditions of a merger before the agreement is concluded. Governments can cede some of their interests in order to give the private sector a chance to make a profit.

By selling some of its assets, a business may be able to reduce costs, pay off outstanding debt, reinvest and focus on its core business, and streamline operations. This in turn can increase shareholder value. This is particularly important in the event of market volatility or if the company experiences unstable conditions.

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divestment

Divestment of assets

There are many different reasons why a business may decide to sell or dispose of its assets. Here are some of the most common reasons:

  1. Bankruptcy: Companies going through the bankruptcy process will have to sell parts of the business.
  2. Reduce locations: A business may find that it has too many locations. When consumers simply don’t walk through the doors, the business may be forced to close or sell some of their locations. This is especially true in the retail sector.
  3. Sell ​​losing assets: If demand for a product or service is lower than expected, a business may need to sell it. Continuing to produce and sell an underperforming asset can reduce a company’s bottom line when it can focus on those that are performing.

Government regulations may oblige companies to sell part of their assets, in particular to avoid a monopoly.

Examples of divestitures

Divestitures can take many forms. The most common form is the sale of a business unit to improve financial performance. For example, Thomson Reuters, a Canadian-based media and information multinational, sold its Intellectual Property and Science (IP&S) division in July 2020. The company initiated the divestiture because it wanted to reduce the amount leverage on its balance sheet.

The division was purchased by Onex and Baring Private Equity for $ 3.55 billion in cash. The IP&S division recorded sales of $ 1.01 billion in 2020, and 80% of these sales are recurring, making it an attractive investment for the private equity firm. The sale represented a quarter of Thomas Reuters’ business in terms of divisions, but should not change the overall valuation of the company.

Key points to remember

  • Divestitures occur when a business sells all or part of its assets by selling, exchanging or closing them, or by bankruptcy
  • As businesses grow, they may decide to focus on too many industries, so divestiture is the way to stay profitable
  • Disposal allows companies to cut costs, pay down debt, focus on core business and improve shareholder value

Divestitures may also occur due to necessity. One of the most famous cases of divestiture ordered by the court concerns the breakdown of the Bell system in 1982. The United States government has determined that Bell controls too much of the telephone service in the country and has launched antitrust actions against the company in 1974. The divestiture created several new telephone companies, including AT&T and the so-called Baby Bells, as well as new equipment manufacturers.

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