What Does Divesting Mean?
Divesting is the process of selling an asset. It is done for either financial or social goals. Divesting is the opposite of investing. The term is often used in a business context to describe companies or governments that divest some of their holdings by selling them off.
Divesting is also known as divestiture and divestment.
Divestopedia Explains Divesting
A divestment is the reduction of an asset or business through sale, liquidation, exchange, closure or any other means for financial or ethical reasons. In order to understand the term, assume that company ABC is the parent of a food company, a car company and a clothing company. If, for some reason, company ABC wants out of the car business, it might divest the business by selling it to another company, exchanging it for another asset or closing down the car company.
In this scenario, optimists often look at divestitures as a way to streamline (i.e. to get back to basics), reduce debt and enhance shareholder value. On the other hand, pessimists may view a divestiture as a negative which highlights the poor historical performance of the divested assets. The term is often used as a means to grow financially, by which a company sells off a business unit in order to focus its resources on a market it judges to be more profitable or promising.
Firms may have several motives for divestitures or divesting including:
- A company may divest (sell) businesses that are not part of its core operation so that it can focus on what it does best;
- Divestitures generate funds for the company because part of the business is sold in exchange for cash;
- A company's break-up value is sometimes believed to be greater than the value of the firm as a whole. This encourages companies to sell off what would be worth more when liquidated than when retained;
- Divestment can help create stability in a company;
- A company might divest a division that's under-performing or even failing;
- The process could be forced upon the firm by the regulatory authorities; and/or
- There might be pressure from shareholders to divest.