Divestment is the process of selling current investments to generate assets that can be used more advantageously. Companies use divestment to change direction and meet changing consumer needs. It can also occur as part of an exit strategy or regulatory changes. Companies closely observe the process before taking action.
Divestments, also known as divestitures, are processes used by businesses when there is a need or desire to initiate a reduction in capital investment. Essentially functioning as the polar opposite of an investment, the divestment process involves selling current investments in order to generate assets that can be used to better advantage in some other way. Companies sometimes use divestment as a means to change the direction of the business in order to meet changing consumer needs and remain competitive.
One of the easiest ways to understand divestment is to think in terms of a company that has been successfully producing a product for many years. However, the change in technology is reducing the demand for the company’s product. A new product is developed which should regain consumer interest. However, this will leave the company with several physical facilities and a large amount of equipment not needed to produce the new product.
In order to generate revenue that will aid in the production of the new product, the company will undergo a period of divestment. Plants and other facilities that are no longer needed for production are sold, along with outdated equipment. By generating revenue from the sale of these divested interests, the company creates resources that constitute a capital investment in the new product.
Sometimes, a company may choose to sell a subsidiary or business unit as part of an exit strategy. This allows the business to begin the migration from focusing on one market sector to a different sector that has more promise. In some cases, the divestment involves the sale of the business unit to another company. Other times, the business unit is completely transformed into a separate company.
Divestment can also occur when you decide to make regulatory changes to an industry. Perhaps the best-known example of this type of divestment enforcement would be the deregulation of the communications industry in the United States in the 1980s. As part of the process, the Bell system was divested entirely and emerged as eight different entities: the new AT&T and seven regional Bell companies that were collectively known as the BaBells.
Since divestment involves the sale of assets, companies often closely observe the process before actually taking any type of divestment action. It’s important to make sure that the investments that will be unlocked will likely not be in demand in the future, and that the revenue generated from the sale of the investments will likely be more likely to increase profitability for the company in the long run.
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