Divestment is the process of selling current investments to generate assets that can be used to better advantage in some other way, often used by companies to change direction and remain competitive. It can involve selling physical facilities, equipment, subsidiaries, or business units and is carefully considered to ensure greater profitability in the long term.
Divestments, also known as divestitures, are processes used by companies 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 the sale of 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 of changing the company’s direction 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, changing technology is decreasing demand for the company’s product. A new product is developed that should regain the interest of consumers. However, this will leave the company with multiple physical facilities and a large amount of equipment that is not needed to produce the new product.
To generate revenue that will help manufacture the new product, the company will go through a period of disinvestment. Plants and other facilities no longer needed for production are sold, along with now obsolete equipment. By generating revenue from the sale of these divested interests, the company creates resources that constitute an equity investment in the new product.
Sometimes a company may choose to sell a subsidiary or business unit as part of a divestment strategy. This allows the company to start the migration, focusing on one market sector to another sector with more promise. In some cases, divestment involves selling the business unit to another company. Other times, the business unit is split into a separate company.
Divestment can also occur when there is a decision to make regulatory changes in an industry. Perhaps the best-known example of this type of divestment application is the deregulation of the communications industry in the United States during the 1980s. As part of the process, the Bell System was completely divested and emerged as eight different entities: the new AT&T and seven companies Bell stations known collectively as BaBells.
As divestment involves the sale of assets, companies often look very closely at the process before implementing any type of divestment action. It is important to ensure that the released investments are unlikely to be needed in the future and that the revenue generated from selling the investments is likely to result in greater profitability for the company in the long term.
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