Hussein Messi
mai 7, 2021

Divestment: Definition, Meaning, Purpose, Types, and Reasons

This company also generally controls the management of that company, as well as directs the subsidiary’s directions and policies. Alternatively, firms are forced into a divestiture by regulatory authorities. The triple bottom line theory maintains that companies should focus as much on social and environmental issues as they do on profits.

define divestment

The government mostly retains more than half of the stake in the public sector enterprise so that the control remains in its hands. But when it doesn’t, then the ownership is transferred to the private sector, which results in privatisation. It is also known as majority disinvestment or complete privatisation wherein 100 per cent control goes to the private sector. For a company that pursues an active divestiture strategy, management regularly performs a review of each business unit and its relevance to the company’s long-term businessstrategy. However, the parent organization is the major shareholder and holds complete control over the divested business unit.


Some companies may choose to grow their existing business units, while others may choose to pursue a new line of business altogether. Divestment or disinvestment means selling a stake in a company, subsidiary or other investments. Businesses and governments resort to divestment generally as a way to pare losses from a non-performing asset, exit a particular industry, or raise money. Liquidation refers to a business shutdown whereby the organization gives away all the assets to the lenders, debenture holders, shareholders, creditors, and other claimants.

define divestment

For example, the Rockefeller Family Foundation, which derived its wealth from oil, divested its energy holdings in 2016 due to false statements from oil companies regarding global warming. These divestment examples show there can be many reasons for divestiture and many outcomes as well. This asks for business or institutions that build income from gas, oil, coal, etc. to develop a divestment strategy to help the issue of climate change. Social causes often create a divestment strategy to make a certain asset (fossil fuels, gambling, etc.) devalued. If an investment definition is picking something up, a divestment definition is putting something down. It is simply selling off all or some of your assets for a benefit.

At the same time, there may be leftover costs from the divested unit in the form of backend processes such as IT or other supporting infrastructure that the company would need to sever or integrate moving forward. Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs up to 50 per cent or more, along with transfer of management control. FREE INVESTMENT BANKING COURSELearn the foundation of Investment banking, financial modeling, valuations and more. Investment PortfolioPortfolio investments are investments made in a group of assets instead of a single asset with the objective of earning returns that are proportional to the investor’s risk profile. Parent CompanyA holding company is a company that owns the majority voting shares of another company .

Examples of divest in a Sentence

The organization can sell out one or more business divisions, subsidiaries, or units. The reason behind such a decision can be a failure of a particular segment, the underperformance of a subsidiary, non-alignment with core functions, or excessive capital requirement. define divestment This is achieved by partially liquidating assets or by selling poorly performing organizational divisions. Organizations may decide on the disinvestment of holdings that no longer fit with their social, environmental, or philosophical positions.

  • There is a separate department under the Ministry of Finance which handles all disinvestment-related works for the government.
  • It is generally paid to employees who are being let go due to job elimination or downsizing rather than the reasons for voluntary termination of employment.
  • The norm is that divestment is done within the framework of restructuring and optimization activities.
  • Also, the firms follow the divestment strategy to shut down its less profitable division and allocate its resources to a more profitable one.

It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. Non-alignment with the primary niche also requires divesting of an asset. OutsourcingOutsourcing refers to contracting out specific business processes to a third-party or specialized service provider, i.e., an individual or company. Horizontal integration is the acquisition, merger, or expansion of a business that increases the market share in its existing industry.

Why do companies divest?

The most common form of corporate valuation is financial modeling, and specifically, discounted cash flow analysis –DCF analysis. The divestiture itself will encompass various aspects of the business such as legal ownership, valuation and change of management, as well as retention and severance of employees. An important part of the economic reforms launched in the early 1990s was the reform package introduced for the public sector. Many of the defective working features of the PSEs were set to be corrected through reforms.

Employee Severance PaysSeverance pay is paid to employees removed or terminated from the employment of the company. It is generally paid to employees who are being let go due to job elimination or downsizing rather than the reasons for voluntary termination of employment. ProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs.

If, for some reason, company ABC wants out of the car business, it might divest the business by selling it to another company, exchanging it for another asset or closing down the car company. Ethical trading is a growing trend, with investors wanting their funds allocated to companies that benefit society as a whole. As a result, this is one of the major drivers of divestment strategies for both individuals and businesses alike. Ultimately, the decision to divest boils down to your financial goals, personal vision, and overall investment strategy.

Synonyms for divest

Following this, the Georgetown University Student Association introduced and unanimously passed a resolution calling upon the university to divest its endowment. Similar action was taken by a coalition of students at the George Washington University in February 2022. The passage of this law was widely seen as a reprisal for an incident in which Cuban military aircraft shot down two private planes flown by Cuban exiles living in Florida, who were searching for Cubans attempting to escape to Miami. It could be forced due to regulatory changes, legal action, or bankruptcy. While divestment is often used to refer to corporate activities, individuals can also sell off problematic assets as part of their wider investment strategy. A decision to divest a business unit can arise from its underperformance in terms of meeting its required rate of return as shown by its Capital Asset Pricing Model.

For example, in the 1980s, American telecommunication company AT&T monopolized the U.S. telecommunications industry. The US government forced AT&T to divest itself by selling off assets, thereby allowing other companies to enter the market. A taxable spinoff is a divestiture of a subsidiary or division by a publicly-traded company, which will be subject to capital gains taxation.

While most divestment decisions are deliberate efforts to streamline operations, forced selling of assets could result from regulatory or legal action such as bankruptcy. The largest corporate divestiture in history was the 1984 U.S. Department of Justice-mandated breakup of the Bell System into AT&T and the seven Baby Bells. Several states and localities did pass legislation ordering the sale of such securities, most notably the city of San Francisco. An array of celebrities, including singer Paul Simon, actively supported the cause. Disinvestment refers to the use of a concerted economic boycott to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change.

Several accounting tasks must be completed before the divestiture can take place. For example, one metric that needs to be calculated is the portion of the divested company’s debt that needs to be allocated to the parent company and other third parties. They must also establish the capital structure of the divested entity. One main task of the selling company is to prepare the “carve-out” financial statements.

Finally, lower stock prices limits a corporation’s ability to sell a portion of their stocks in order to raise funds to expand the business. The term is often used in a business context to describe companies or governments that divest some of their holdings by selling them off. When looking at the divestment meaning, you’ll see that it doesn’t only apply to businesses.


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