What is Divesture?

Divesture is the sale or disposition of an asset. You may also hear divesture referred to as divestiture or divestment. There are a number of reasons to choose to get rid of assets, and a variety of ways in which such assets can be disposed of. In a simple example of divesture, a company which focuses on the manufacture of cars might choose to divest itself of a division which handles experimental aircraft, under the assumption that the division is worth more on its own, and that it distracts from the company's key mission.

One of the most common motivations for divesture is economic. Simply put, when an asset is no longer making money for its parent company, the company may choose to sell or otherwise dispose of it before it becomes a liability. Likewise, companies may spin off divisions which would be more profitable on their own, or be encouraged to sell divisions and assets which are more valuable to potential buyers than they are to the company.

Sometimes, divesture is carried out in response to a government mandate. Many governments are concerned about the growth of monopolies, and if a company acquires too many companies which are similar to itself, it may be ordered to divest to encourage healthy competition. If, for example, one producer of commercial aircraft bought up the other three manufacturers of aircraft in a nation, it would be considered a monopoly, and it would be ordered to divest.

Companies may also opt for divesture in response to social pressures. Socially conscious investors may be reluctant to invest in companies which produce certain products, so companies may choose to shut down production of these products in a divesture in order to attract investors. Divesture may also be related to political pressures: several companies which do business with oppressive foreign regimes, for example, have divested to improve their public image.

When a company divests, it can choose to do so gradually over time, or suddenly. There are advantages and disadvantages to both methods. A company which rapidly carries out a series of divestments may spark investor panic, leading people to believe that the company is at risk of going under, as struggling companies often sell parts of themselves off to raise capital. Slow divesture is usually seen as more prudent, suggesting that a company is carefully pruning itself to refine the goods and services it offers.