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Divestiture
Definition:
Divestiture is the process of a company selling a subsidiary or asset to another company. It is typically used to reduce the company’s size, eliminate non-core businesses, or raise capital.
Reasons for Divestiture:
- To focus on core businesses: Companies may divest assets that are not core to their primary operations, allowing them to concentrate resources on their main businesses.
- To raise capital: Divestiture can generate cash flow, which can be used for debt reduction, expansion, or other investments.
- To reduce debt: Companies may divest assets to reduce their debt burden.
- To improve operational efficiency: Divesting businesses that are not profitable can streamline operations and improve overall efficiency.
- To exit a market: Companies may divest assets to exit a particular market or industry.
Types of Divestiture:
- Partial divestiture: Sale of a portion of a subsidiary or asset.
- Complete divestiture: Sale of the entire subsidiary or asset.
- Spin-off: Creation of a new company by extracting a subsidiary or asset from the parent company.
Process of Divestiture:
- Identifying potential buyers: Companies identify potential buyers who are interested in the asset or subsidiary.
- Negotiation: The company and buyer negotiate the terms of the divestiture.
- Due diligence: The buyer conducts due diligence to assess the value and condition of the asset or subsidiary.
- Finalization: The divestiture is finalized with the signing of a binding agreement.
Examples:
- A company may divest a subsidiary that is not profitable.
- A company may divest a factory to reduce debt.
- A company may spin off a division to create a new company.
Benefits of Divestiture:
- Increased focus on core businesses
- Improved financial performance
- Reduced debt
- Increased liquidity
- Opportunity to exit unwanted markets
