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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.
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