Business divestiture is an important strategy for the growth of many companies, but what does it mean and what is an example of divestiture? Here’s everything you should know about this topic.
What Is Business Divestiture
A business divestiture is when a company disposes of some or (more rarely) all of its assets. In this context, assets include intellectual property, manufacturing facilities, physical buildings, and anything else that may be of value or relevant to a particular product or service.
What Does Divestiture Mean In Business
In business, the primary goal of a business strategy divestiture is to refocus the company. This usually means reducing the number of things the company is focusing on so it can give more focus to those and, hopefully, become more profitable.
How this occurs depends on the unique status and needs of each company. For example, in 2022, an investor of entertainment company Hasbro asked them to divest their Wizards of the Coast division, suggesting that the division had outsized value and it was the overall company that was holding the division back, not the other way around.
Hasbro ultimately rejected this idea, which was probably wise of them. They know that most of their core products have cyclical lifespans, so they’d rather keep things and sit on them for decades if necessary.
The real divestiture meaning in business isn’t limited to getting rid of low-performing segments. It can also include getting rid of high-performing things to help them reach their full potential.
In other words, divestiture is like having business and personal accounts at the same bank. It may sound nice to have everything consolidated at first, but as each grows, you may realize that a different bank would be more appropriate for one of those sides. Other banks may have more services or opportunities, so keeping things together is ultimately a bad idea.
Types of Business Divestiture
There are several common types of divestitures that a company may go through. Divestitures are more likely when they’re agreed upon internally or when major investors present a persuasive case to the board of directors. If an individual shareholder doesn’t have much power and can’t get any outside backing, divestiture is rare.
One of the preferred options is selling the assets outright. This gives full rights and control of the assets to another business that’s in a better spot to invest and capitalize on the opportunity. Selling provides a one-time cash infusion and possibly shareholder dividends, but requires a selling company to prove that the assets are still valuable.
Acquiring assets sold this way is often a great plan to grow small business organizations. Even if the assets aren’t hugely profitable, they may bring in enough revenue to help a smaller company grow its core focus and reach its full potential.
More rarely, companies may exchange assets with one or more other businesses. This can allow all companies involved to lose assets that don’t match their business and gain other assets. It’s rare for assets in any exchange to have the same value, so this may also involve a payoff to equalize the difference.
In a worse scenario, companies may close down the assets entirely. Most companies try to avoid this because there’s no return at all on their investment. Shareholders also tend to hate this result. However, if a company can’t find any buyers, it may decide to accept the loss and move on.
As an alternative, companies may spin off the assets to form a new company. This is generally preferable to closing it down entirely. Investors usually get shares in the new company and help generate value, although they may not be independently profitable right away. This is also used to help free high-value segments up to focus on one thing, as in the Hasbro example above.
Finally, companies may go through bankruptcy. This is usually similar to selling the assets, but may be necessary for paying creditors or changing the company enough to let it keep operating.
Ultimately, all types of business divestiture point to one thing: how staying agile in an ever-changing world is important to businesses.
What Is an Example of Business Divestiture?
There are plenty of examples of a business divestiture, but here are some company divestiture examples to show how it works in the real world.
In January 2022, Microsoft announced its plan to acquire Activision Blizzard King (a video game software company) for about $68.7 billion. This is an example of a complete divestiture, where an individual company is selling all of its assets to become a division of another company.
This move allows ABK to eliminate many of its marketing and leadership requirements, transferring those to Microsoft so the company can refocus on making games. It also gives Microsoft extensive control over ABK’s employees and assets, which some people consider necessary given allegations of abuse and other problems at ABK.
The acquisition also works well for Microsoft, which has been aggressively acquiring video game developers as part of its long-term strategy to perform better in that software sector.
Roche is a Swiss pharmaceutical company. Beginning around 2000, Roche started to divest various divisions, including those dealing with products like fragrances, vitamins, and some types of chemicals. Together, the divested assets accounted for about a quarter of the company’s assets from the previous decade.
However, they needed to make large investments to maintain performance in those sectors, and Roche wanted to focus on its medical technology instead. It divested in several ways, including spinning off some companies, selling assets to other businesses, and simultaneously acquiring other assets.
Is Business Divestiture Worth It?
Ultimately, the only way to tell whether business divestiture is worth it is to evaluate the unique situation and needs of each company. Details like the time for a buyer to realize the deal’s value, the realistic pricing for a deal, and even motivating employees can all affect the final value of a divestiture plan.
However, it’s worth noting that many companies have seen great success through divesting their assets. Public companies are always seeking growth, but sometimes the growth they get isn’t as valuable for them as it could be. Divesting allows them to refocus on the things they’re best at and expand into different areas.
As such, the larger a company is, the more valuable divesting will probably become at some point.
About the Author, James Webster
James Webster, founder and Executive Chairman of ROK Financial has almost two decades of experience within the financial services industry. His passion for helping small business owners and his innovative way of thinking, has allowed him to run multiple successful businesses including National Business Capital & Services. Under the National name, the team was able to help secure over $1 Billion in financing for small businesses nationwide.