What are some of the most common reasons why divestment occurs?

What are the Reasons for Divestitures to Occur?

In the field of finance, liquidation or disposal It is defined as the disposal of an asset through sale, exchange or closing. Divestment is an important way for companies to create value. mergers, acquisitionsand the consolidation process. For example, a merger could create redundant operations and businesses. The company can improve operational efficiency and reduce costs through divestitures. But there are many reasons why companies decide to divest, and not all of them have a positive impact on the company.

Understanding Reasons for Disposal

Companies that divest part of their business may do so by selling a share. subsidiary or a separate business operating under parent company. Divestitures are common at large publicly traded companies because they typically own more business units and are more likely to acquire companies outside their industry. Acquisitions involve the purchase of a company or a specific business unit.

While there are numerous reasons why companies divest assets or parts of their business, below are some of the more common scenarios in which companies engage in divestitures.

Bankruptcy

Companies frequently visit bankruptcy Due to operating and financial issues, divestment is almost always part of this process. Divestment can help the company reduce costs, improve cash flowand we emerge from bankruptcy a healthier company. General Motors, for example, filed for bankruptcy in 2009 and closed at least 11 unwanted factories. As part of the company, it divested some of its unprofitable brands, such as Saturn and Hummer. rearrangement plan.

Increase Cash

Another common reason to divest is to raise cash. This is especially important for companies experiencing operational and financial difficulties. For example, Sears Holdings, a consumer retail company, was struggling with declining sales and negative cash flow. In 2014, as part of its survival plan, the company announced that it would divest its real estate assets to raise funds to continue reorganizing its retail business. But Sears, which also owns Kmart, has struggled since emerging from bankruptcy in 2019, despite closing hundreds of stores and using money from divestitures to pay down some of its debt.

Non-Core Businesses

Companies may divest businesses that are not part of their core operations so they can focus on their core business. Union Carbide, a well-known industrial chemical and plastics manufacturer, was founded in 1989. spin off non-core consumer group business so that it can focus more on its core business.

WeWork Corporation, which provides office sharing spaces for rent, faced financial difficulties in 2020. As a result, the management team announced that it would divest non-core businesses, including its content marketing and software businesses.

Earning

Companies often withdraw investments to increase their profitability. Gain is synonymous net income or snow. In 2006, Philips, a Dutch technology company, decided to divest its chip subsidiary NXP Semiconductors. The main reason for selling NXP was the high volatility and unpredictability in earnings of its chip business, which hurt Philips’ share value.

Strengthen the Balance Sheet

When a company’s top management states that it has taken measures to strengthen the company’s stability balanceThis usually means they want to pay off the debt.

For example, in 2020 General Electric Corporation (G.E.) announced the completion of the divestiture of its BioPharma division, for which GE received approximately $20 billion in cash. GE chairman and CEO H. Lawrence Culp Jr. said the sale helps “eliminate our balance sheet risk and continue to solidify our financial position,” according to the press release.

Unlock Value

A firm often splits into two or more companies to realize value believed to be greater for separate assets than in a consolidated company. This is especially important during: liquidation. For example, investors are willing to pay much more separately for different parts of the company, such as real estate, equipment, etc. trademarks, patents and other parts instead of purchasing them from a single company.

low performance

Companies often divest parts of their business that do not meet their expectations. These divestitures may include the elimination of subsidiaries or divisions. poor performance.

One notable example of such a divestiture was by Target, a large consumer retailer. Target’s stores in Canada did not perform well due to weak demand from Canadian customers. In 2015, Target decided to exit its business in Canada by closing its stores or selling them to related parties.

Regulations

Divestitures sometimes occur for regulatory reasons such as: antitrust regulators’ concerns. A notable example of divestiture requested by regulatory authorities involved Bell Systems in 1982. Due to Bell’s monopoly position in the telecommunications industry, the US government dissolution of the companyIt created many smaller companies, including AT&T.