Divestitures are part of the world of mergers and acquisitions, but they are lesser known. Whilst they can be challenging, they can also be very powerful tools when used properly.
What is a divestiture?
A divestiture is the disposal of any assets belonging to a company through sales, exchanges, closure or bankruptcy. A divestment can be court-ordered when appropriate and assets can be disposed of either fully or partially.
Why do companies divest?
There can be a variety of reasons behind a company’s decision to divest. If your business is staring into the depths of bankruptcy then divestment might be an option to help cut your losses. Divesting after bankruptcy can help to increase cash flow and lower any operating costs that remain. There may also be court-ordered divesting when bankruptcy is involved.
Even when a business is doing well, it may need to raise some extra capital. Divesting will generate cash flow that is easier to access than a loan. It also prevents the need to sell off any equity and get the business into debt.
When a business wants to streamline its operations, it is common for them to divest any parts that are no longer in line with its core industry. This can also happen when a business changes course and focuses on a different industry or sector. Divesting outlying branches can help to raise capital for the new venture and can help to reduce organisational complexity.
Types of business divestitures
When a business is considering divesting, there are four main routes it can take.
- Spin-off– this is where a subsidiary company is created from the parent company. Shareholders are given a share in the subsidiary company which makes it a non-cash and tax-free transaction.
- Split-off – where a parent company gives a subsidiary company some of its corporate assets in exchange for controlling the stocks of the new company. Shareholders then have a choice of whether to keep their shares in the parent company or the new subsidiary.
- Equity carve-out – a parent company sells a certain amount of equity in a subsidiary on the stock market. This is common for companies that are seeking financial growth.
- Direct sale of assets – this is where a parent company sells assets such as equipment and buildings to a third party. As this is a cash transaction, it can cause tax liability issues for the parent company.
What to consider before you divest
Divestments can be more complex than standard mergers or acquisitions, and therefore they can require more strategic planning before going ahead. To ensure you have all your bases covered, retain an expert team of corporate solicitors to help you through the process.
You will need to consider issues such as employment. You may want to transfer some staff around so this needs to be completed properly with the correct notice and contractual changes.
There may also be an issue with permits and licenses. If your business needs those to operate and you sell it, the buying party needs to be sure they can obtain the same permissions as you, otherwise the asset may be rendered worthless as it is.
