Divestment
Divestment represents the act of selling or offloading an asset, subsidiary or even a division of a business with the intention of increasing the value of the parent company.
It is possible to differentiate between different kinds of divestments:
- Spin-offs – separating an autonomous business from the parent company
- Sale of assets – directly selling assets of the company
- Equity carveout – selling a certain percentage of the equity in a subsidiary to the public through a stock market offering.
There are multiple reasons why companies would chose to divest, among them:
- Increased liquidity – during economic downturns, selling some of the company’s assets may provide a quick cash injection that can help the business to overcome short-term losses.
- Reevaluation of business strategy – large companies can get in the habit of continuously acquiring smaller businesses, even if they do not directly complement the parent company’s core activities. In these situations, the parent company may choose to offload the smaller companies, to focus on their core activities.
- State intervention – in highly regulated jurisdictions, if a company becomes too large and shows signs of monopolistic behaviour, governments may intervene requiring the company to divest, in order not to abuse the market.
- External political reasons – businesses may choose to show their political support by ceasing operations ruled by authoritarian regimes. The latest example of such a situation involves countless companies ceasing their operations in Russia, in order to oppose the country’s invasion of Ukraine.
