What is the concept of Divestiture?

Divestiture is described as “a part or total disposal of an asset or a business entity through a sale, exchange, closure or a bankruptcy”. The management thinks of disposal of a unit or business entity because contribution of that unit or business entity is minimal or nothing.

Reasons

The reasons for divestiture are as follows −

• Heavy loss in units.
• Negative cash flows over a period of time.
• Unable to compete in the market.
• No technology up gradation.
• Difficult to integrate.
• Alternative for good investment.
• Legal problems.
• Less or minimum market share.

Types

The types of divestiture are as follows −

• Spin offs − Subsidiary company is created.

• Splits − Parent company is split into two or more subsidiaries.

• Equity carve outs − Some percentage shares of subsidiary companies are issued to the public.

• Disinvestment − Company liquidates its stocks.

Advantages

The advantages of divestiture are as follows −

• Cash generation from non core investments.

• Business expansion.

• Improves Return of equity.

• Shareholders get higher returns.

Disadvantages

The disadvantages of divestiture are as follows −

• Future growth opportunity is eliminated.

• Fluctuations of cash flows.

• Reorganizations of other units.

• Not for long term cash needs.

• Unit can be revived.