Divestment

500 Shareholder Threshold

What is divestment?

Divestment is the process of selling subsidiary assets, investments or divisions in order to maximize the value of the parent company. Also known as divestment, it is the opposite of an investment and is generally made when the assets or the division of that subsidiary do not perform as expected. Companies can choose to deploy this strategy to meet financial, social or political objectives.

Understanding divestment

Divestment involves a business selling its assets, often to improve its value and achieve greater efficiency. Assets available for sale include a subsidiary, a sales department, real estate, equipment and other assets. Divestment can be due either to a business optimization strategy or to foreign circumstances, such as when investments are reduced and companies withdraw from a particular geographic region or industry due to pressures political or social.

Many companies use divestment to sell peripheral assets, allowing their management teams to focus more on the core business. The proceeds from divestment are generally used to repay debt, make capital expenditures, finance working capital, or pay a special dividend to shareholders of a business. Although most divestment operations are deliberate, the company has initiated efforts, but this process could sometimes be imposed on them due to regulatory measures.

Whatever the reason a company chooses to adopt this strategy, divestment will generate revenue that can be used elsewhere in the organization. In the short term, this increased revenue will benefit most organizations as they can allocate the funds to another division that meets expectations. The exception would be if the business were forced to sell a profitable asset or division for political or social reasons that could cause loss of income.

Key points to remember

  • Divestment is the process of selling subsidiary assets, investments or divisions in order to maximize the value of the parent company.
  • Although most divestment operations are deliberate, the company has initiated efforts, but this process could sometimes be imposed on them due to regulatory measures.
  • Divestment usually takes the form of spin-offs, share exclusion or direct asset sales, and the most common reason for deploying this strategy is to eliminate non-strategic activities.

Types of divestments

Divestment generally takes the form of a spin-off, exclusion of shares or direct sale of assets. The benefits are non-cash and tax-free transactions when a parent company distributes shares of its subsidiary to its shareholders. Thus, the subsidiary becomes an independent company whose shares can be traded on the stock exchange. Benefits are most common among businesses that consist of two separate businesses that have different growth or risk profiles.

Under the stock exclusion scenario, a parent company sells a certain percentage of the shares of its subsidiary to the public via a stock exchange. Equity exclusions are non-taxable transactions that involve the exchange of cash for stocks. Since the parent company generally retains the controlling interest in the subsidiary, equity exclusions are most common among companies that have to finance growth opportunities for one of their subsidiaries. In addition, equity exclusions allow companies to establish trading opportunities for the shares of their subsidiaries, and to subsequently dispose of the remaining interest in appropriate circumstances.

Another popular form of divestment is the direct sale of assets, including entire subsidiaries. In this case, a parent company sells assets, such as real estate, equipment or the entire subsidiary, to another party. The sale of assets generally involves liquidity and may have tax consequences for a parent company if the assets are sold at a profit.

Main reasons for divestment

The most common reason for divestment is the sale of non-core activities. Companies can have different business units that operate in different industries, which can be very distracting for their management teams. The sale of a non-core business unit can free up time for the management of a parent company to focus on its core business and skills. For example, in 2020, General Electric made the decision to sell its secondary financing arm by selling Synchrony Financial shares on the New York Stock Exchange.

In addition, companies sell their assets to obtain funds, abandon an underperforming subsidiary, respond to regulatory measures and realize value through a break-up. Finally, companies can engage in divestments for political and social reasons, such as the sale of assets that contribute to global warming.

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