Editing Divestment

{{Short description|Reduction of some kind of asset for an objective or sale of an existing business by a firm}}
{{About|the routine business practice|politically motivated boycott|disinvestment}}
{{Original research|date=February 2021}}
{{Finance sidebar}}
In [[finance]] and [[economics]], '''divestment''' or '''divestiture''' is the reduction of some kind of [[asset]] for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an [[investment]]. Divestiture is an adaptive change and adjustment of a company's ownership and business portfolio made to confront with internal and external changes.<ref>{{Cite journal|last=Brauer|first=Matthias|date=December 2006|title=What Have We Acquired and What Should We Acquire in Divestiture Research? A Review and Research Agenda|url=http://journals.sagepub.com/doi/10.1177/0149206306292879|journal=Journal of Management|language=en|volume=32|issue=6|pages=751–785|doi=10.1177/0149206306292879|s2cid=144147684 |issn=0149-2063|url-access=subscription}}</ref>

== Motives ==
Firms may have several motives for divestitures:

# a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, [[Eastman Kodak]], [[Ford Motor Company]], [[Future Group]] and many other firms have sold various businesses that were not closely related to their core businesses.
# to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, [[CSX Corporation]] made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.
# a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
# divesting a part of a firm may enhance stability. [[Philips]], for example, divested its chip division - [[NXP Semiconductors|NXP]] - because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.
# divesting a part of a company may eliminate a division which is under-performing or even failing.
# regulatory authorities may demand divestiture, for example in order to create competition.
# pressure from shareholders for social reasons (sometimes also called [[disinvestment]]).  Examples include [[disinvestment from South Africa]] in the former era of [[apartheid]] (now ended), [[disinvestment from Israel]] due to the [[occupation of the Palestinian territories]], [[disinvestment from Russia]] due to the [[2022 Russian invasion of Ukraine]] and calls for [[fossil fuel divestment]] in response to [[climate change]].

=== Divestment for financial goals ===

Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. Sometimes, such an action can be a [[Corporate spin-off|spin-off]]. In the United States, divestment of certain parts of a company can occur when required by the [[Federal Trade Commission]] before a merger with another firm is approved. A company can divest assets to wholly owned subsidiaries.

It is a process of selling an asset. 
The largest corporate divestiture in history was the 1984 [[U.S. Department of Justice]]-mandated [[breakup of the Bell System]] into [[Old AT&T|AT&T]] and the seven [[Baby Bell]]s.

Of the 1000 largest global companies, those that are actively involved in both acquiring and divesting create as much as 1.5 to 4.7 percentage points higher shareholder returns than those primarily focused on acquisitions.<ref>{{cite web|last1=O’Connell|first1=Sean|last2=Park|first2=Michael|last3=Thomsen|first3=Jannick|title=Divestitures: How to Invest for Success |publisher=Transaction Advisors|issn=2329-9134|url=https://www.transactionadvisors.com/insights/divestitures-how-invest-success}}</ref>

=== Divestment for social goals ===
{{See also|Disinvestment}}

Examples of divestment for social goals include:
* [[Disinvestment from Israel]], a movement by [[Criticism of the Israeli government|critics of Israel]] (since 1920s)
* [[Disinvestment from South Africa]] in the former era of [[apartheid]] (1960s-1990s)<ref>{{Cite journal |last1=Hunt |first1=Chelsie |last2=Weber |first2=Olaf |last3=Dordi |first3=Truzaar |date=2017-01-02 |title=A comparative analysis of the anti-Apartheid and fossil fuel divestment campaigns |url=https://doi.org/10.1080/20430795.2016.1202641 |journal=Journal of Sustainable Finance & Investment |volume=7 |issue=1 |pages=64–81 |doi=10.1080/20430795.2016.1202641 |s2cid=168472615 |issn=2043-0795|url-access=subscription }}</ref>
* [[Tobacco industry]] divestment, coordinated by the NGO Tobacco-Free Portfolios (since 2000s)
* [[Fossil fuel divestment]] in response to [[global warming]], coordinated by the NGO [[350.org]] (since 2010s)
* [[Intensive animal farming|Factory farming]] divestment<ref>{{cite web |title=Factory farming divestment: what you need to know |date=2016-03-03 |website=[[The Guardian]] |archive-url=https://web.archive.org/web/20230517103255/https://www.theguardian.com/sustainable-business/2016/mar/03/factory-farming-divestment-explain |archive-date=2023-05-17 |url-status=live |url=https://www.theguardian.com/sustainable-business/2016/mar/03/factory-farming-divestment-explain}}</ref> and big livestock divestment in response to environmental destruction, animal suffering, and human health concerns, coordinated by NGO Feedback Global.<ref>{{Cite web|url=https://feedbackglobal.org/campaigns/the-end-of-big-livestock/|title=End of Big Livestock|website=Feedback|date=16 April 2019 |language=en-US|access-date=2019-06-02}}</ref>

== Method of divestment ==

Some firms are using technology to facilitate the process of divesting some divisions. They post the information about any division that they wish to sell on their website so that it is available to any firm that may be interested in buying the division. For example, Alcoa has established an online showroom of the divisions that are for sale. By communicating the information online, Alcoa has reduced its hotel, travel, and meeting expenses.

Firms use transitional service agreements to increase the strategic benefits of divestitures.

Divestment execution includes five critical work streams: governance, tax, carve-out financial statements, deal-basis information, and operational separation.<ref>{{cite web |last1=Hammes |first1=Paul|title=Are You Considering Divesting Assets? If Not, You Should Be|url=https://www.transactionadvisors.com/insights/are-you-considering-divesting-assets-if-not-you-should-be|publisher=Transaction Advisors |issn=2329-9134}}</ref> Companies often create cross-disciplined teams composed of IT, HR, legal, tax, and other key business units, to implement a business separation.<ref>{{cite web |last1=Markel|first1=Carina|last2=Smith |first2=Lawson |last3=Farkas|first3=Jennifer|title=A Billion Dollar Successful Separation |url=https://www.transactionadvisors.com/insights/billion-dollar-successful-separation|publisher=Transaction Advisors |issn=2329-9134}}</ref>

With [[economic liberalization]] of the [[Economy of India|Indian economy]], India's [[Ministry of Finance (India)#Department of Disinvestments|Ministry of Finance]] set up a separate [[Ministry of Finance (India)#Department of Disinvestments|Department of Disinvestments]].

== See also ==
*[[Mergers and acquisitions]]
*[[Corporate spin-off]]
*[[Consolidation (business)]]
*[[Corporate social responsibility]]
*[[Demerger]]
*[[Disinvestment]]
*[[Fossil fuel divestment]]
*[[Financial economics]]
*[[Tax resistance]]
*[[Socially responsible investing]]
*[[Stranded asset]]

==References==
{{Reflist}}

{{corporate finance and investment banking}}
{{Authority control}}

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