Understanding Divestiture: Definition, Reasons, and Examples

What Is a Divestiture?

A divestiture is the partial or full disposal of a company or other entity's operations or assets through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a company's core competency.

A divestiture may also occur if a business unit is deemed to be redundant after a merger or acquisition, if the disposal of a unit increases the sale value of the firm, or if a court requires the sale of a business unit to improve market competition.

In-Depth Look at Divestitures

Technically, the offloading of any asset, such as intellectual property rights, real estate, a piece of machinery, or something else an entity owns, can be categorized as a divestiture. However, the term is often used primarily in reference to business units, which represent more significant disposals.

Why would a company divest a business unit? There are various reasons and it isn't necessarily always voluntary.

As companies grow, they may find they're in too many lines of business and must close some operational units to focus on more profitable lines. Many conglomerates face this problem. Companies may also sell off business lines if they are under financial duress. For example, an automobile manufacturer that sees a significant and prolonged drop in competitiveness may sell off its financing division to pay for the development of a new line of vehicles.

Alternatively, an entity may be forced into divesture because of bankruptcy or to ensure a merger or acquisition satisfies competition laws. Regulatory authorities may agree to let a company buy another company provided that it sells one of its business units first if owning that unit on top of the new operation would give it an unhealthily large amount of market share.

By divesting some of its assets, a company may be able to cut its costs, repay its outstanding debt, reinvest, focus on its core business(es), and streamline its operations. This, in turn, can enhance shareholder value.

Top Reasons Companies Choose to Divest

There are many different reasons why a company may decide to sell off or divest itself of some of its assets. Here are some of the most common ones:

1. Bankruptcy: Companies that are going through bankruptcy will need to sell off parts of the business.
2. Cutting back on locations: A company may find it has too many locations. When consumers just aren't coming through the doors, the company may be forced to close or sell some of its locations. This is especially true in the retail sector, including in fashion, banking, insurance, food service, and travel.
3. Selling losing assets: If demand for a product or service is weaker than expected, a company may need to sell it. Continuing to produce and sell an underperforming asset will cut into the company's bottom line and eventually force management, under pressure from shareholders, to conclude that its resources need to be put to better use, such as by concentrating on areas of the business that are performing well. Company bosses are tasked with putting the company's capital to work in the best way possible, which often means being ruthless and chasing opportunities with the highest prospective return on investment (ROI).
4. Raise funds: Companies need funds for various reasons, like investment, expansion, or paying off large debts or fines. Usually, money is raised from equity or debt. However, there may be cases where these options aren't available or management believes it can get a better return from selling off assets.
5. Political divestiture: Companies may divest from certain assets due to political or ethical liabilities. Examples include the movement to divest from fossil fuels, or the movements to divest from geographies that are politically controversial, like Israel or Russia. For example, Boycott, Divestment, and Sanctions, an activist group, is calling for divestment by international companies from Israel for what they describe as its "oppression against Palestine."
6. To comply with regulators: Governments generally encourage competition in markets as it gives consumers options and theoretically helps keep prices lower. If a company gains too much power and market share, regulators may force it to divest assets to restore balance. For example, if a company with an already strong hold of a market agrees to acquire another company in that same market, regulators may intervene and only let the deal go ahead if the acquirer sells one of its divisions.
   

Real-World Divestiture Examples

Divestitures can come about in many different forms, including the sale of a business unit to improve financial performance and due to an antitrust violation.

Meta-Giphy Sale

In 2023, Meta (formerly Facebook) sold the animation database Giphy to Shutterstock for $53 million, which represented an 83% loss on what it paid for Giphy just three years earlier. The sale was forced by U.K. regulators, who believed that Facebook's acquisition of the gif-animation platform represented a violation of the country's antitrust laws.

Kellogg Split

In 2022, foods manufacturer Kellogg announced its plans to split into three separate companies, spinning off its cereal and plant-based food brands. While the legacy Kellogg's company will focus on the frozen breakfast and snack foods that bring in 80% of the old company's revenue, the spin-offs will focus on the cereal markets and plant-based foods.

The Bottom Line

A divestiture happens when a company sells part of its business or spins it off into a new entity. Companies may divest in order to focus on a core competency, raise cash, or reduce exposure to an underperforming business segment. They may also divest due to regulatory pressure if the combined entity has too large a market share.