Divestment strategies are financial approaches that involve the sale or liquidation of assets or business units within a company. Divestments can occur for several reasons and be used in various strategies:
- Focus on Core Operations: Companies often divest business units or subsidiaries that are not part of their core operations. The company might have initially expanded into those areas as part of a growth strategy. Still, over time, these areas may distract from their core business or not generate sufficient profits.
- Raise Capital: Companies might divest assets or business units to raise capital for new investments or to repay debts. The company can quickly generate cash by selling off assets.
- Efficiency Improvements: Divestments can also be used to improve operational efficiency. By selling underperforming or non-core business units, a company can reduce its complexity and strengthen its focus on its most profitable areas.
- Regulatory Requirements: Sometimes, divestment is necessary due to regulatory requirements. For example, after mergers or acquisitions, a company might have to divest certain assets to avoid violating antitrust laws.
- Environmental, Social, and Governance (ESG) Concerns: Some divestment strategies are driven by social or environmental considerations rather than purely financial ones. For example, a company might choose to divest from industries seen as harmful to the environment or society, such as fossil fuels or tobacco. This can also apply to investment funds that follow socially responsible investing (SRI) principles.
The process of divestment includes:
- Identifying the assets or business units to be sold.
- Valuing these assets.
- Finding potential buyers.
- Carrying out the transaction.
After the divestment, the company might use the proceeds to invest in its remaining operations, return money to shareholders, or reduce debt.
Types of divestment strategies
There are several types of divestment strategies, each with unique circumstances, objectives, and considerations. Here are some common types:
- Spin-offs: A company creates a new, independent company by separating a subsidiary or business unit. Shareholders of the parent company typically receive shares in the new company. Spin-offs are often done to allow the separated unit to focus on its unique strategies, opportunities, and challenges.
- Split-ups: In a split-up, a company is separated into two or more independent companies. Unlike a spin-off, the original company ceases to exist. Each new company tends to focus on a distinct set of operations.
- Equity Carve-outs: A company sells a part of a subsidiary or division to outside investors through an initial public offering (IPO). The parent company often maintains a controlling interest in the carved-out company. This is commonly done to raise capital or to allow the carved-out company to capitalize on growth opportunities that might not be aligned with the parent company’s operations.
- Asset Sales: A company sells its assets (such as real estate, equipment, intellectual property, or entire business units) to another company or investor. This strategy is typically used to raise capital, reduce debt, or eliminate non-performing or non-core assets.
- Liquidation: This is the process of selling a company’s assets, paying off creditors, and distributing any remaining funds to shareholders. This is usually the last resort when a company is insolvent or when its continued operation is no longer viable.
- Management Buyouts (MBOs): A company’s management team purchases the assets or outstanding stock of the company to gain full control. This is often done when the team believes that the company is undervalued or that it can improve the company’s performance.
- Social or Environmental Divestment: This is a strategy used by individuals, companies, or investment funds to remove investments in industries or sectors considered harmful to society or the environment. For example, a fund might choose to divest from fossil fuel companies due to climate change concerns.
Examples of Divestment Strategies
- Spin-off: In 2020, VF Corporation, the apparel and footwear company, completed the spin-off of its Jeanswear business into a separate public company, Kontoor Brands. This allowed VF Corporation to focus on its active and outdoor lifestyle brands and Kontoor Brands to operate independently with a focus on denim.
- Split-up: In 2015, eBay and PayPal split into two separate publicly traded companies. The split-up enabled each company to focus on its core business and pursue its strategic objectives independently.
- Equity Carve-out: In 2019, Siemens AG spun off its Gas and Power division into a separate entity through an initial public offering. The spin-off, Siemens Energy, allowed Siemens AG to focus more on its core areas, such as digital industries and smart infrastructure.
- Asset Sale: In 2016, Yahoo! Inc. sold its core internet business to Verizon Communications Inc. for $4.83 billion. The sale was part of Yahoo’s plan to slim down and turn around its struggling operations.
- Liquidation: In 2017, Toys “R” Us filed for bankruptcy and decided to liquidate its assets after failing to restructure its heavy debt load or find a buyer. The company closed its stores and sold off its assets to pay its creditors.
- Management Buyout (MBO): In 1989, the airline company United Airlines experienced an MBO, considered one of the largest at the time. The employees acquired most of the company’s stocks through their Employee Stock Ownership Plan (ESOP).
- Social or Environmental Divestment: In recent years, many institutional investors like universities and pension funds have divested fossil fuels due to climate change concerns. They’re selling off their holdings in coal, oil, and gas companies and instead investing in renewable energy and other more sustainable technologies.
Case Study on Divestment Strategy
Let’s look at a famous case study: the divestment of Nokia’s mobile phone business to Microsoft.
In the 2000s, Nokia was the world’s largest vendor of mobile phones. However, the advent of smartphones like Apple’s iPhone and brands using Google’s Android operating system began to eat into Nokia’s market share. Nokia had its Lumia smartphone running on Microsoft’s Windows Phone platform but struggled to compete against its rivals.
The Divestment Decision By 2013, Nokia had decided to divest its struggling mobile phone division. Microsoft, keen on boosting its position in the smartphone market, decided to buy Nokia’s phone business. The deal was announced in September 2013, with Microsoft paying €5.44 billion (around $7.2 billion).
The Rationale From Nokia’s perspective, the decision to sell off its phone business was based on several strategic considerations:
- Nokia’s mobile phone business was not performing well financially and was losing market share. By divesting this struggling business, Nokia could stem its financial losses.
- The divestment allowed Nokia to focus on its other businesses, particularly its networking equipment business, Nokia Networks, which was more profitable and had better long-term prospects.
From Microsoft’s perspective, acquiring Nokia’s phone business offered a chance to strengthen its position in the mobile market, particularly by boosting the prospects of its Windows Phone platform.
The Outcome The deal closed in April 2014. However, it didn’t turn out well for Microsoft. The company struggled to integrate the Nokia business and to make a success of its mobile phones. By 2015, Microsoft had written off $7.6 billion related to the acquisition and announced plans to lay off up to 7,800 employees, primarily in the phone business.
Meanwhile, Nokia concentrated on its network infrastructure business and digital mapping services. By getting rid of a struggling division, the company was able to stabilize its finances and focus on more profitable areas.
This case study is a good example of a divestment strategy driven by a need to focus on core operations and stop financial losses. Although the Outcome was not positive for Microsoft, it shows that divestment can be a crucial strategic option for companies in certain situations.
