Strategic Divestment: 6 Key Reasons for Corporate Asset Sales

Deciding to divest assets can be difficult for many business conglomerates. However, there are many reasons big business needs to undergo divestment, also known as divestiture: to protect against insolvency, bankruptcy or loss of profits. More often than not, this move has a strong impact not only on the operations of the subsidiary being divested but also on the financial stability of the entire conglomerate or core businesses. Below are six reasons big companies decide to release assets by means of divestment.

1. Divest to Obtain Funds

In times of financial difficulties, companies opt to sell off non-core assets in order to obtain funds that are important in keeping their primary business afloat. Instead of putting money in a poorly performing subsidiary or unit, businesses choose to sell assets or close subsidiary operations to save money and prevent insolvency or liquidation of the mother company.

2. Focusing on Primary Business

In the early 1980s, the acquisition or takeover of smaller companies by conglomerates became the business trend. Big companies bought units that were not even related to their core operations. It was common to find food companies venturing into real estate or banking. However, in the 1990s, many conglomerates realized that managing non-core assets while keeping the main business productive could be very hard to achieve. Diverting resources to non-core businesses can hurt the main operations of a company. Nowadays, one of the common reasons corporations spin off, sell or close non-related units is to have all their resources focused on building up the main business and maximize profitability.

3. Prevention of Monopoly

There are times when companies are compelled to divest because of legal issues. In order to maintain fair trade and prevent monopolistic practices, anti-trust commissions in various countries mandate divestment. In the United States, the government agency responsible for determining if a company needs to sell or release its non-core asset is the Federal Trade Commission (FTC).

4. Availability of Other Investment Opportunities

The majority of companies have limited resources. Thus, when better business opportunities are available, corporations decide to divest assets and business units that are unproductive, unrelated or unmanageable. It is not really surprising for companies to divert their resources from a not-so-profitable business unit to one that promises a higher rate of return on the same amount of investment.

5. Inability to Achieve Synergy or Strategic Fit

Divestment is a good option for a company to consider if an acquired business unit prevents the conglomerate from achieving synergy or strategic fit. When a business line no longer fits the image or the direction of the company, it is better for its owners to get rid of it. This is common when a conglomerate decides to restructure or change its focus, especially after management changes.

6. Social or Political Reasons

There are certain cases when a company chooses to divest primarily due to political or social reasons. When there is public clamor for businesses to cease their operations or sell off investments in areas where there are socio-political tensions or questionable governments, then a conglomerate may be forced to get rid of certain business units.