Chapter:10

Concept of Divestitures
Meaning of Divestitures
 A divestiture is the partial or full disposal of a
business unit through sale, exchange, closure or
bankruptcy.
 Divestment is the process of selling subsidiary
assets, investments, or divisions of a company in
order to maximize the value of the parent company.
 The Sale of a part of firm to another company is
reffered to as a divesitures.

 The Firm sale a part ,receives the payment in

cash,marketable securuity or a combination of both.
 Divestment involves a company selling off a
portion of its assets, often to improve
company value and obtain higher efficiency.
 Many companies will use divestment to sell
off peripheral assets that enable their
management teams to regain sharper focus
on the core business.
Exmaple:
 Company XYZ is the parent of a food
company, a car company, and a clothing
company. If for some reason Company XYZ
wants out of the car business, it
might divest the business by selling it to
another company, exchanging it for another
asset, or closing down the car company.
Example
 Reliance Infra’s sale of power business
to Adani for $2.9 billion,
 L&T’s sale of electrical business to a clutch of

PE investors for $2.8 billion,

 Jaiprakash Cement selling a part of its

cement business to UltraTech Cement

Types of Divestitures
1) Voluntary Divestitures
 This is a process wherein the selling entity
fees that a certain division is not adding to
its profitability and is diverting the company
‘s attention from the more profitable
divisions.
 To refocus its attention on the profitable
divisions, the company might decide to
divest the unprofitable division
 Expanding the profitable divisions.
 Distribution among the shareholder.
 Buyers usually pay in cash, marketable
securities, or a mix of the two.
2) In voluntary Divestitures

 When a firm is compelled to divest itself off

a particular assets a result of a legal dispute
it is referrers to involuntary divestiture.
 Involuntary divestitures occur when a firm

receives a negative review by the FTC.

 Example: In june 1983 When Snta fe merged
with southern pacific. However it was
followed by an antitrust Petition filed aginst
the merger. In june 1987 the Inter State
commerce commission adjuged that the
merger was against the competition, It was
believed that such a giant firm would reduce
competiotion in the market. The ISCC ordered
Snata Fe-Southern Pacific to submit a
Divestiture Plan Within 90Days.
Reasons For Divestiture.
 Unprofitable Division
 Bad Fit: Purchased assets may not perform as

anticipated and turn out to be a bad fit.

 Failure To generate hurdle rate of return: The

hurdle rate of return is the minimum

thresholds that a company uses to evaluate
projects acquired target.
 Capital Market Factors: Combined entity has
business interest in fast moving consumer
goods and automobile. Some investors might
be interested in investing in FMCG and
automobile.
 Generate Cash Flow: A firm particularly
during a financial cris ,resorts to divestiture
to generate cash flow. firms choose to sell a
division that owns long terms assets.
 Abandoning core business: Every business

reaches a stage of maturity which reduces

growth opportunity .An entity that faces this
situation diversifies in tom more profitability
and finance expansion of such projects by
selling off the core business.