What Is Divestment? Key Types And Strategic Approaches

Your business may occasionally need to sell off some of its assets or make adjustments. It could be for a variety of reasons, but many companies use divestitures to sell specific assets. This is done to refocus the business's core areas. When you invest your money, you are most likely going to buy a stock, a bond, or another type of income-producing investment. Several businesses invest to generate revenue. These investments may include the fossil fuel industry, oil companies, or gas companies. In this blog, we will shed light on divestment separation, its types, and approaches:

What exactly is divestment?

A divestment is a process where a company sells assets or divisions for the value creation of its parent company. This is frequently carried out when an asset is not operating as planned, and it may be the result of strategic business, social, political, or legal actions. Companies often sell peripheral assets to refocus on core operations, and divestment can be a result of corporate optimisation strategies or extenuating circumstances like social or political pressures or the pandemic's impact on remote work and technology use, affecting office space and other commercial properties.

What are the different types of divestment?

There are typically three types of divestment. They are a spinoff, an equity carve-out, and a direct asset sale. Let us take a closer look at each one.

• Spin-offs:

• Non-cash, tax-free transactions common among companies with two distinct businesses.

• Frequently found in businesses with different risk and growth characteristics

• Equity Carve-outs:

• Tax-free transactions where a parent company sells a portion of its equity via a stock market offering.

• Equal exchange of shares for cash.

• Direct Asset Sale:

• Involves selling off assets, including real estate or equipment, typically in cash.

• May have tax implications if sold for profit.

• Under duress, may result in a fire sale below book value.

What are the best divestment strategies?

Divesting is relatively simple on its own. However, a divestment strategy can help ensure that your portfolio remains profitable after any assets are sold. Here are some of the most effective divestment strategies for you to implement before signing the TSA (Transition Services Agreement).

• Open a new long position: Reallocate funds post-divestment to reinvest or speculate on future market prices. Select appropriate stocks and conduct a fundamental analysis to assess profitability and social impact.

• Short-sell a stock: Profit during a downturn by betting against the market. Historically, it involved borrowing shares, selling them at the current market price, and repurchasing them at a discount. Keep the price differential.

Final Words

Divestment is the act of selling an asset and reducing its exposure to refocus on core business areas. Common strategies include opening a new long position or short-selling the stock. Businesses can also use IT audit services for a smooth transition of all technological aspects of the company. Companies often divest to refocus efforts, but social or political pressure may also be a factor. Some of the most focused areas include fossil fuel, tobacco, and gun manufacturers. Making better divestment decisions and eventually reaching financial objectives is made easier when these factors are understood.

Source - https://bmlventures.hashnode.dev/what-is-divestment-key-types-and-strategic-approaches