What is the concept of Divestiture?

FinanceBanking & FinanceGrowth & Empowerment

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.

raja
Updated on 16-May-2022 14:42:40

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