Rusq.org explains what Divestment is
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What is the definition of Divestment?
- Divestment is the reduction of certain types of assets for the financial, political, ethical … existing goals of a company. Divestment is a very popular form of investment, when investors or individuals want to withdraw their investment capital. This could be part of a corporate structuring strategy, it could be a political agenda, or it could be due to social pressures. In general, divestment is due to many different reasons. Depending on the specific reasons, the business will have an appropriate solution.
- Understanding what divestment is, you will see that it is just a very normal economic phenomenon. Of course, it also causes a lot of trouble for the host business. However, in some cases, if handled well, divestment will be an opportunity for businesses to “change blood” effectively.
Reasons why businesses divest
As analyzed above, divestment is not necessarily a bad thing. Because it happens based on many different factors, there are active but also passive. So what are the reasons why businesses divest?
- If they find that the business is not effective, investors will want to divest their capital to ensure their benefits.
- The total liquidation value of a company’s personal assets exceeds the market value of the company’s combined assets. This incentivizes companies to sell off what will be more valuable when liquidated than when it is held.
- Enterprises actively divest capital to focus on core activities of the company. By eliminating redundant areas, they will have more resources to develop their core business.
- The divestment helps to create a certain source of capital for the business through the sale of assets, shares, etc.
- Divestment due to pressure from society, politics, shareholders…
Types of divestment
- There are many forms of divestment that businesses can use, the most common of which are spin-offs, initial stock sales or direct asset sales.
- Spin-off is a concept used for tax-free cashless transactions when a parent company distributes shares of a subsidiary to its shareholders. As a result, the subsidiary becomes an independent company with shares that can be traded on a stock exchange.
- Spin-offs are most common in companies that have two separate businesses with different growth and risk factors.
- When selling initial shares, the parent company sells a percentage of equity in the subsidiary on the stock exchange. Selling shares is initiated by making stock transactions with tax-free cash. Since the parent company usually holds a controlling stake in the subsidiary, the trigger sale is most used by companies that need to finance growth opportunities for the subsidiary.
- In addition, the initial sale of shares also allows companies to generate revenue trading shares of subsidiaries, and then dispose of the remaining shares under appropriate circumstances.
- Direct asset sales are another common form of divestment, where the parent company sells assets such as real estate, equipment, or a subsidiary to another party. The sale of an asset usually deals with cash and to the parent company may be taxable if the sale of the asset is profitable.
What to do when divested?
The divestment, whether like it or not, it will also have certain effects within the business. To overcome that instability, businesses need to:
- Find a new partner: In case a strategic shareholder divests through the form of selling shares to another partner, the enterprise has the advantage of not having to find a replacement partner. However, no matter what, businesses need to learn more about this new partner to have a suitable cooperation plan.
- Have a capital redistribution plan: Reallocating capital is very important. Actively mapping out a specific strategy will help the company plan to increase capital or invest effectively.
- Timely disclosure: When a divestment occurs, there will be negative sentiment within the company. Therefore, enterprises should choose the way of announcement to jointly find out solutions and specific plans to stabilize the company’s situation.
- Actively learn: For most investment organizations, divestment is always in the plan. Business owners need to actively find out the factors that can cause divestment to handle and overcome in time.
- Focus on business management: This is when you need to focus on your core areas. One is to stabilize the company and the other is to attract new investors.
After knowing what to do after being divested, you should immediately deploy and apply to reduce the loss to a minimum!
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