The sale or disposition of an asset is referred to as divesture. You may also have heard this term divesture referred to as divestiture or divestment. There are a number of reasons due to which a person choose to get rid of assets, and there are a variety of ways in which such assets can be disposed of. Here I am explaining you a simple example of divesture, a company who focuses more on the car manufacturing may opt to divest itself of a division by which experimental aircraft is handled, due to the reason that it assumes that the division is worth more on its own, and that it distracts from the company’s main mission.
Economy – A motivation for divesture
Economy is one of the most common motivations for divesture. Explaining in simple words, when an asset is no longer able to make money for its parent company, then the company may choose to sell or otherwise dispose of it before that it becomes a liability. Likewise, companies may spin off divisions which would be more profitable on their own, or they may sell divisions and assets which are more valuable to potential buyers as compared to the company itself.
Divesture in response to a government mandate
Sometimes, the companies carry out divesture in response to a government mandate. Many governments are very much concerned about the growth of monopolies, and if a company has acquired too many companies which are identical to itself, then the government may order them to divest to encourage healthy competition.
If, for instance, the other three manufacturers of aircraft are bought by one producer of an aircraft, then this would be considered a monopoly, and the government would order the company to divest.
Divesture in response to social pressures
There are probabilities that the companies may also choose for divesture in response to social pressures. Socially conscious investors may be reluctant to invest in companies by which certain products are produced, so companies may choose to shut down production of these products in a divesture so that the investors are attracted towards them. It is possible that the divesture may also be related to political pressures, several companies which conduct their business with oppressive foreign regimes, for example, have divested so that they can improve their public image.
Advantages and disadvantages of both gradual and sudden divestion
When a company divests, it depends on that company that weather it can choose to do so gradually over time, or suddenly. To both methods there are certain advantages and disadvantages. A company by which a series of divestments are carried out rapidly may spark investor panic, it makes the people presume that the company is at risk of going under, as struggling companies often sell parts of themselves off in order to raise capital. Slow divesture is usually seen as more prudent, as it suggest that a company is carefully reducing itself to refine the goods and services that is offered by the company.
