Want to Know More About Divestment Strategy? Here’s Our Divestment Definition with Examples
Everybody knows a little something about investment. But not many people know about or understand the concept of divestment. Both are important financial moves individuals or companies can take.
This means it is important to know a divest definition and understand what divestment strategy really is.
That is why we have created this divestment definition 101 guide. When you are done, you will not only have a divest definition, you should be able to really understand the whole process. You will read about:
- A general divest definition
- A financial divestment definition
- Reasons for divestiture
- Divestment strategy options
- Divestment examples
This information will help you understand the divestiture process more clearly – whether you are simply interested in learning more about it through a divest definition or you may need to develop your own divestment strategy in the future.
If you think a divestiture process is in the future for your company – you are not alone. In 2016, nearly half of companies said they planned for some divestiture over the next two years.
What Does It Mean to Divest? A General Divest Definition
To better understand concepts like divestiture and divestment strategy, let’s first understand what divesting really is with a divestment definition.
We will start with the word divest, which can itself mean multiple things in the English language. The divest definition from Merriam-Webster reads:
“to deprive or dispossess especially of property, authority, or title…to take away from a person”
Oxford puts their divest definition more simply: “Deprive someone of (power, rights, or possessions).”
As you can see, a divest definition has to do with depriving, or dispossessing, or getting rid of.
That concept brings us to the particular divestment definition we are focusing on in this article, which has to do with finances.
What Is Financial Divestment? A Divestment Definition
Let’s dig into the divest definition in the finance world. You have undoubtedly heard of an investment, where you spend money hoping to achieve a profit. Let’s talk about the opposite.
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The divestment definition from Investopedia is:
“The process of selling an asset for either financial, social or political goals. Assets that can be divested include a subsidiary, business department, real estate, equipment and other property. Divestment can be part of following either a corporate optimization strategy or political agenda, when investments are reduced and firms withdraw from a particular geographic region or industry due to political or social pressure.”
The divestment definition from InvestorWords is:
“Refers to the sale of an asset for financial, legal or personal reasons. For corporations, divestment can refer to a company selling off a portion of its assets, such as a subsidiary, to raise capital or to focus the business on a smaller core of goods and services. For investors, divestment can be used as a social tool to protest particular corporate policies, such as a company trading with a country known for child labor abuses. Divestment can also be required of companies by the Federal Trade Commission in order to have a merger approved.”
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So What Does It Actually Mean?
We may see these official divestment definition wordings, but what does it all mean in the real world? It is simple:
The divest definition is simply the opposite of an investment. In an investment, you hand over money for a benefit. In divestment, you are given money for a benefit.
If an investment definition is picking something up, a divestment definition is putting something down. It is simply selling off all or some of your assets for a benefit. And that benefit could be many different things.
Know that this type of divesting is also known as divestiture. We will use these two terms interchangeably throughout the guide.
Why Divestiture? Is It Always a Bad Thing?
Now that we know the definition of divestiture, let’s see why it is used at all. Initially, you may think that a divestiture process automatically means failure: companies or individuals have to get rid of their investments because they have no money.
Sometimes this is true, but there are also positive divestment examples. In fact, Business Insider reports that “companies’ stock prices tend to grow at a greater pace after a divestment.”
And more can be better: “those that divest 20% of their business fare far better in the market than those that divest just 5%.” This goes to show that the divestment definition does not equal failure.
Of course, there are times when divesting is a last resort option for more funds. While this can feel like a negative decision, it can ultimately have a positive result.
Common Reasons for a Divestment Strategy
As you can see from above, there are many reasons an individual or a company may want to employ a divestment strategy (and not all are bad).
Here is a list of some of the most common reasons for divestiture. Some are positive, others are negative, and some fall somewhere in the middle:
- Perhaps a company wants to focus on one particular aspect of their business.They can divest a smaller, less substantial line of business to gain capital and refocus their resources on the core business.
- If one aspect or division of a business is not making profit or sucking profit, a company may need a divestiture process to get rid of it.
- Sometimes a judgment call needs to be made. Say there is a fabulous investment opportunity that looks as though it would perform better than an asset you already have.Your divestment strategy works to make more funds available for the better opportunity.
- Regulation can be a force for divestiture, too – for legal/ethical reasons (like avoiding a monopoly or having a conflict of interest).
- Social causes often create a divestment strategy to make a certain asset (fossil fuels, gambling, etc.) devalued. This helps the cause of getting rid of that asset.
- Divestment can have negative causes, too: bankruptcy, the need for funds, etc.
As you might imagine, divestment can sometimes be a great thing for a business. Sometimes, it can be a terrible thing. They key is always a divestment strategy: figuring out your goal and then how to implement the divestiture.
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Here are three common divestment strategy options you may see frequently:
- Spinoff: This is when a business “spins” part of the business into a new independent company.
- Selling something: This could be selling an entire business line or simply getting rid of real estate.
- Liquidating: This is completely selling an entire business, whether that is as a whole or for it’s parts (example: divesting the warehouse to one person and the patents to another, etc.).
The Harvard Business Review set up guidelines that help ensure this type of divestiture option ends with returns for shareholders. Here are the four main points:
- Establish a dedicated team
- Test for fit and value
- Plan for de-integration
- Provide a compelling logic for buyers and employees
Of course, the best way to see if your divestment strategy is beneficial is to talk to an investment expert or financial advisor.
Sometimes the easiest way to understand the definition of divestiture or to comprehend divestment strategy is to look at divestment examples.
Here are a few divestment examples to get you started:
- The New Yorker recently wrote about Jared Kushner’s (President Trump’s son-in-law) divestiture process as he takes his political position.In order to stay legal, Kushner used a divestment strategy to drop large assets “including his ownership stake in an office tower…and in the New York Observer.”
- The Harvard Business Review highlighted Weyerhaeuser, a forest-products company for their divestiture process.The company had divestment of over $9 billion. They used that money to move from a paper company into “timber, building materials, and real estate” which “produced some of the highest returns in its sector.”
- There is currently a universal movement calling for fossil fuel divesting.This asks for business or institutions that build income from gas, oil, coal, etc. to develop a divestment strategy to help the issue of climate change.
Divestment examples like this one have happened before with tobacco.
- A few years back, the company Johnson & Johnson made quite a few divestiture process moves.For example, they sold their ortho-clinical diagnostics unit to the Carlyle group.
These divestment examples show there can be many reasons for divestiture and many outcomes as well. It may be political, social, personal, or business-related.
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Conclusion – Divestment Definition 101
Now that you have your divest definition, understand divestment strategy, and know some divestment examples, you should have a good grasp on what divestiture is and why it is important in the financial world.
You may only need this divestment definition information to better understand what is going on in the news today, but you may need to really understand the divestiture process as a businessperson.
Either way, this guide stands as your definition of divestiture. And remember the divest definition is not always a bad thing or sign of failure. It can be a great decision for success and for ethics.
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