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For companies, divestment is particularly important because it provides cash and cash equivalents that can be used to preserve or progress the business. For example, it is often possible to do without borrowing to raise capital and thus to obtain outside financing. However, a divestiture can also significantly reduce operating assets.
In order for a divestment to occur, capital must first have been invested in assets. These can be real estate, company segments, machines or even materials. Ultimately, internal financing can only take place on the basis of existing, originally committed assets. If these are not available, the alternative is still capitalization via the sale of shares via shares or bonds and financing via loans, sometimes they won’t even check.
Reasons for a divestment
- A company desperately needs cash but does not want to take credit for it.
- A company improves its profitability by selling uneconomic or obsolete assets or parts of companies.
- Regulatory authorities require a company to sell parts of companies for antitrust reasons.
- There are state sanctions and a state authority requires, for this reason, the sale of a company division.
- Shareholders or shareholders ask a company to part with a business for moral, ethical or profit-oriented reasons.
- Individual company shares are sold as part of a company dissolution in order to achieve a higher overall price.
- Disposals to the goal of “sale and leaseback”. For example, real estate is first sold and subsequently leased by the company to the buyer for the purpose of a better balance sheet and higher liquidity.
Then a divestment of disadvantages
disinvestment always entails a liquidation of assets in favor of liquid funds. The divestment company directly increases its liquidity. But if it sells through this form of internal financing assets that actually secure the operation, in the worst case, the divestiture can hinder the operation and the ability to act of a company.
For this reason, companies must always weigh whether internal financing will not jeopardize the business. Otherwise, the desired financing will do exactly the opposite.
Expiration of the divestment
Each disinvestment is linked to a specific goal or multiple goals. These goals are usually defined in advance. Thereafter, the assets or investments are valued in terms of their value, which can be achieved with a sale. Depending on the type of corporate assets, buyers must be sought. For financial assets, the company is looking for the way to the appropriate bank.
For larger disinvestments, the internal financing is accompanied by the respective finance and legal department. With the proceeds of the financing, the capital released will be used for the desired purpose.
In principle, divestments have a financing function and enable longer-term committed capital to be released. They can be used both in companies and in the private sector.
- If a company carries out an ethically motivated divestiture, it can improve its reputation. The actual purpose of the internal financing occurs in the background. This is the case, for example, when a company separates itself from a division that is ethically questionable.
- Politically motivated divestments can be enforced by a state leadership. For example, a company would be forced to cease production of certain goods because they violate the interests of the country. This form of forced disinvestment is also called divestment.
Two examples of divestments
- An automaker has several types of vehicles in its portfolio : cars, commercial vehicles and trucks. After some time, it turns out that the commercial vehicle division only incurs losses, but the demand for SUVs increases significantly. An investment in new production facilities is therefore urgently needed. In order not to borrow from a financial institution or to issue new shares, the automaker sells its already-deficient commercial vehicle division. The capital raised will be invested directly in SUV production. Thus, new financial assets are created at the same time.
- In the private sector, a disinvestment is also possible . A homeowner borrowed ten years ago for his home. The interest rates were very high at the time and are still very high after the end of the fixed interest period. But he also owns another property that he no longer needs and that he no longer wants to rent. Therefore, he sells this property and thus replaces the expensive credit of his own home. In this way, he is debt-free and can now invest the money for the installments in other investment products.
Special Form Divestment Campaigns
A divestment, that is, a divestment forced by the state, can theoretically affect any company that violates certain principles of investors or states.
- Divestment campaigns aimed at investors: In this case, large investors may require private investors or smaller investors to disinvest. They should then sell their company shares. However, the campaigns can also have an ethical-moral background. For example, there are NGOs that ask investors to sell shares in defense companies or encourage investors to sell shares of AGs that support child labor.
- State-initiated Divestment Campaigns: States may encourage or discourage companies to divest businesses from having business contacts with certain customers for investment. This form of divestment campaign is usually part of an economic boycott. More recently, companies in the US have been asked to stop investing in Iran or Syria. Most Western countries also stop investing in North Korea.
Further classic examples of divestments:
- Call on the tobacco industry to reduce its investment
- Urging defense companies to stop investing in certain products
- Calling on energy companies to stop the nuclear power plant
Objectives of the divestment
The primary goal of a divestment is to create cash from existing assets. In addition, companies can pursue other goals:
- Financing an operation extension
- Restructuring of a company
- Increase liquidity for a corporate takeover
- Debt cancellation
- Investment in new machines or new staff
- Expansion of activities in new markets
- Investing the capital freed up into new products or research
- Consolidation by dissolving redundant business units
- Company Liquidation
Advantages and disadvantages of a divestment