IMPORTANCE OF DIVESTITURE

Divesting is amongst the most difficult business decisions when operating a multi-divisions company.  However, there are benefits to divesting such as protecting against bankruptcy, hedging against profit losses, and preventing political and legal issues. Subsequently, divestiture leads to a company's financial stability and growth.  Below are some reasons why companies chose to divest rather than trying to push through and possibly fail.

  • Obtain capital in order to scale the primary business unit. This reason prevents from an overall liquidation or bankruptcy. Rather than pouring capital into underperforming units, selling these units enables a company to reinvest in its core division.
  • Concentrate on core business areas. Overtime, some companies acquire smaller businesses that have no association with any of their core divisions. This disconnect hurts the bottom line, therefore carving out unrelated business units would recoup the loss of profit.
  •  Occasionally, companies are forced into divestiture due to legal and governmental interference. Government agencies have the ability to halt mergers but also force companies to release non-core assets in order to prevent potential monopolies.
  • Pursue of better opportunities. Divestiture permits a company to gain financial resources needed for compelling investment opportunities – strengthening core business areas and higher ROI.

In conclusion, a divestiture is a reduction of assets or business units through sale or liquidation for financial, political, strategic, and synergic reasons. Divesting business units matters because it helps a company reduce debt, enhance shareholder value, regain profit, and reorganize a company back to focusing on its strength. 

Romain Ly