Divestment

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In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.

Finance Academic discipline studying businesses and investments

Finance is a field that is concerned with the allocation (investment) of assets and liabilities over space and time, often under conditions of risk or uncertainty. Finance can also be defined as the art of money management. Participants in the market aim to price assets based on their risk level, fundamental value, and their expected rate of return. Finance can be split into three sub-categories: public finance, corporate finance and personal finance.

Economics Social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Asset economic resource, from which future economic benefits are expected

In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash. The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.

Contents

Motives

Firms may have several motives for divestitures:

  1. a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak, Ford Motor Company, Future Group and many other firms have sold various businesses that were not closely related to their core businesses.
  2. to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.
  3. a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
  4. divesting a part of a firm may enhance stability. Philips, for example, divested its chip division - NXP - because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.
  5. divesting a part of a company may eliminate a division which is under-performing or even failing.
  6. regulatory authorities may demand divestiture, for example in order to create competition.
  7. pressure from shareholders for social reasons (sometimes also called disinvestment). Examples include disinvestment from South Africa in the former era of apartheid (now ended), and more recent calls for fossil fuel divestment in response to global warming.

Divestment for financial goals

Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. Sometimes, such an action can be a spin-off. In the United States, divestment of certain parts of a company can occur when required by the Federal Trade Commission before a merger with another firm is approved. A company can divest assets to wholly owned subsidiaries.

A corporate spin-off, also known as a spin-out, or starburst, is a type of corporate action where a company "splits off" a section as a separate business.

Federal Trade Commission Government agency

The Federal Trade Commission (FTC) is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act. Its principal mission is the promotion of consumer protection and the elimination and prevention of anticompetitive business practices, such as coercive monopoly. It is headquartered in the Federal Trade Commission Building in Washington, D.C.

It is a process of selling an asset. The largest corporate divestiture in history was the 1984 U.S. Department of Justice-mandated breakup of the Bell System into AT&T and the seven Baby Bells.

The breakup of the Bell System was mandated on January 8, 1982, by an agreed consent decree providing that AT&T Corporation would, as had been initially proposed by AT&T, relinquish control of the Bell Operating Companies that had provided local telephone service in the United States and Canada up until that point. This effectively took the monopoly that was the Bell System and split it into entirely separate companies that would continue to provide telephone service. AT&T would continue to be a provider of long distance service, while the now-independent Regional Bell Operating Companies (RBOCs) would provide local service, and would no longer be directly supplied with equipment from AT&T subsidiary Western Electric.

Of the 1000 largest global companies, those that are actively involved in both acquiring and divesting create as much as 1.5 to 4.7 percentage points higher shareholder returns than those primarily focused on acquisitions. [1]

Divestment for social goals

Examples of divestment for social goals include:

Disinvestment from Israel is a campaign conducted by religious and political entities which aims to use disinvestment to pressure the government of Israel to put "an end to the Israeli occupation of Palestinian territories captured during the 1967 military campaign." The disinvestment campaign is related to other economic and political boycotts of Israel.

Criticism of the Israeli government

Criticism of the Israeli government, often referred to simply as criticism of Israel, is an ongoing subject of journalistic and scholarly commentary and research within the scope of international relations theory, expressed in terms of political science. Within the scope of global aspirations for a community of nations, Israel has faced international criticism since its declaration of independence in 1948 relating to a variety of topics, both historical and contemporary.

Disinvestment from South Africa

Disinvestmentfrom South Africa was first advocated in the 1960s, in protest of South Africa's system of apartheid, but was not implemented on a significant scale until the mid-1980s. The disinvestment campaign, after being realized in federal legislation enacted in 1986 by the United States, is credited by some as pressuring the South African Government to embark on negotiations ultimately leading to the dismantling of the Apartheid system.

Method of divestment

Some firms are using technology to facilitate the process of divesting some divisions. They post the information about any division that they wish to sell on their website so that it is available to any firm that may be interested in buying the division. For example, Alcoa has established an online showroom of the divisions that are for sale. By communicating the information online, Alcoa has reduced its hotel, travel, and meeting expenses.

Firms use transitional service agreements to increase the strategic benefits of divestitures.

Divestment execution includes five critical work streams: governance, tax, carve-out financial statements, deal-basis information, and operational separation. [2] Companies often create cross-disciplined teams composed of IT, HR, legal, tax, and other key business units, to implement a business separation. [3]

With economic liberalization of the Indian economy, India's Ministry of Finance set up a separate Department of Disinvestments.

See also

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References

  1. O’Connell, Sean; Park, Michael; Thomsen, Jannick. "Divestitures: How to Invest for Success". Transaction Advisors. ISSN   2329-9134.
  2. Hammes, Paul. "Are You Considering Divesting Assets? If Not, You Should Be". Transaction Advisors. ISSN   2329-9134.
  3. Markel, Carina; Smith, Lawson; Farkas, Jennifer. "A Billion Dollar Successful Separation". Transaction Advisors. ISSN   2329-9134.