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5 Min. Read

What Is Divestment? Definition & Strategy

What is Divestment? Definition & Strategy

There are times where your business might need to make some changes or sell off a portion of its assets. It could be for any number of reasons, but a lot of companies will use divestments to sell certain assets. This is done to refocus on the core areas of the business.

When you invest your money, you are likely going to buy a stock, a bond or some type of other investment that generates income. Several universities and colleges, religious organizations and other institutions invest to generate income. And sometimes these are investments in things like the fossil fuel industry, oil companies or gas companies.

So, what is divestment and how does it work?

Here’s What We’ll Cover:

What Is Divestment?

Different Types of Divestments

The Best Divestment Strategies

Key Takeaways

What Is Divestment?

Divestment is when a business sells assets, investments or a division of their company to maximize the value of the parent company. It can also get known as a divestiture, but divestments are basically the exact opposite of an investment. And they usually get done when an asset isn’t performing up to its expectations.

Some companies might even be forced to sell certain assets due to legal actions or regulatory actions. There might also be situations where a company is looking to satisfy other strategic business, social or political goals.

The reason that a company would sell off a portion of its assets is often to help improve the company value and achieve higher efficiency. Most companies will sell peripheral assets that help management teams refocus on the core areas of the business. And divestment can result from a corporate optimization strategy or from extenuating circumstances.

This could be due to social or political pressure when it comes to the use of fossil fuels, for example. Another example would be the impact of the COVID-19 pandemic, which has led to remote work and the increased use of technology. The result has been a significant impact on things like office space and commercial real estate.

Different Types of Divestments

There are usually three different types of divestment. They’re a spin-off, an equity carve-out and a direct sale of assets. Let’s take a closer look at each one.

  • Spin-offs. These are non-cash and tax-free transactions. These are the most common with companies that have two separate and distinct businesses. And those businesses usually have different growth and risk profiles.
  • Equity carve-outs. This is when a parent company sells a percentage of its equity through a stock market offering. Equity carve-outs are tax-free transactions that include the equal exchange of shares for cash.
  • Direct sale of assets. The direct sale of assets is when your company sells off its assets, which could be real estate or equipment. This process usually involves cash and it might have some tax implications if the assets get sold for a gain. If this happens under duress, it might result in a fire sale where assets get sold for below book value.

The Best Divestment Strategies

Divesting is fairly straightforward on its own. But having a divestment strategy can help ensure that your portfolio remains profitable after any assets get sold. Here are some of the best divestment strategies for you to implement.

  • Open a new long position. Reallocating funds after divestment is a normal process to take. You can either reinvest the funds or hold tight and speculate on the future market price. To do this, make sure you find the right stock to invest in. You should also perform a fundamental analysis to examine its profitability and social impact.
  • Short-selling a stock. Short-selling is when you take a position that there’s going to be a decline in the market. You then bet against the market and profit when there’s a downturn. Traditionally, short-selling was borrowing shares and selling them for the current market price. Then, the shares get repurchased later at a discount. You then keep the price difference.

Key Takeaways

Divestment is basically the process of selling off an asset and reducing its exposure to refocus on core areas of the business. There are various strategies that you can use to divest to help make sure your portfolio remains profitable. Two of the most common strategies are opening a new long position or short-selling the stock.

Most companies divest to refocus their efforts, but there can be other reasons to take on a divestment strategy. There could be social or political pressure on your company to make changes. Some of the largest areas of focus have been things like fossil fuel companies, tobacco and gun manufacturers.

Regardless of the financial reasons, knowing these details leads to better divestment decisions. Which will ultimately help you to reach your financial goals.

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