Divestment definition
/What is Divestment?
Divestment is the process of eliminating assets from an organization. The general reason for doing so is to increase the value of a business by reorienting its capital into better investment opportunities.
Reasons for Divestment
There are many reasons for engaging in an asset divestment. For example, assets are underperforming, so they are sold to generate cash for investment in more promising opportunities. Or, regulators mandate that a company sell off certain subsidiaries; this is most common in a heavily controlled industry. Another reason is that assets relating to peripheral areas are sold, so that management can concentrate its efforts on the organization’s core activities. Yet another reason is that prime assets are sold in order to make the business look less valuable to a corporate raider. Or, assets are sold in order to raise cash to pay down debt, thereby giving the business a more conservative financial profile.
Minimize Environmental Damage
A very good reason for a divestment is to sell off assets in order to eliminate anything causing environmental damage. The cost of environmental remediation can be massive, so this can be considered loss avoidance. These types of remediation have caused some businesses to declare bankruptcy, so this is not a minor issue. Furthermore, selling these assets may improve the profile of the remaining business with stakeholders and environmental activists.
Spin-Offs
Some divestments take the form of spin-offs, where subsidiaries are set up as separate enterprises that are owned by the former parent company’s investors. Spin-offs do not result in any cash inflow to the former parent company. Instead, cash only flows to the investors if they subsequently sell their shares in the spun-off business.