Meaning and definition of divestment
Divestment basically refers to the process of selling an asset. This process is also referred as divesture. The process is carried out either for social or financial goals. Divestment is the converse of investment.
Investopedia states divestment as a more apposite term in the following contexts:
- A change in corporate strategy
A firm might state that they are divesting a specific subsidiary to focus on their basic business.
- Social goals
There are numerous political reasons why investors might reduce investments. A notable example includes the withdrawal of American firms from South Africa during apartheid.
Therefore, in economics and finance, divestiture or divestment is the reduction of any kind of asset for either financial or ethical purposes or sale of an existing business by a firm.
Objectives of divestment
Firms might feature several objectives for divestment. The most important ones include:
1. A business firm may divest businesses which are not part of its basic operations so that it can focus on what it is good at.
2. Another objective of a divestment is obtaining funds. Divestment produces funds for firm as it is selling out one of its businesses in lieu for cash.
3. The next important objective for divestment is featured in a firm’s “break-up” value to be higher than the value of the entire firm. Putting it other way, the sum of a firm’s independent asset liquidation values exceed the market value for the combined assets of the firm.
4. Also, a firm might indulge in divestment for the objective of stability.
5. Another important objective for divesting a part of the company might be the fact that a division is failing or under-performing.
6. The final reason for divestment could be forced on to the firm by the authority in operation.
Moreover, the process is also used with the objective of financial growth in which a firm sells out a business unit so as to focus their resources on a market which seems to be more profitable or promising.
Many firms are using technology to assist the process of divesting some divisions. They post the info about any division which is to be sold out on their website thus making it available to any firm which is interested in purchasing the division.
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