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When looking at your company assets, do the investments match up with your mission statement? Divestment offers a way to walk back assets that no longer align with your goals. But what does divest mean to everyday investors? Find out more as we define divestment, right here.
Divestment is the opposite of investment, though both processes work towards the same goal of maximising value. This term refers to the process of selling a company’s investments, divisions, or assets. These can be sold off for numerous reasons, all relating to underperformance. For example, an asset may no longer meet your business’s ethical viewpoints or align with your financial goals.
Divestment is not always voluntary. It could be forced due to regulatory changes, legal action, or bankruptcy. While divestment is often used to refer to corporate activities, individuals can also sell off problematic assets as part of their wider investment strategy.
What does “divest” mean in finance?
In the corporate world, divestment is used to improve a company’s overall value by shedding inefficient assets. By getting rid of these side divisions or assets, the company can focus additional resources on its fundamental business activities.
Divestment decisions might be made for purely financial reasons, or they may relate to extraneous social or political pressures. For example, if a company has a branch operating in a region undergoing political instability, it might make sense to divest resources from this area. There are many items that can be divested, aside from simply stock and shares:
Real estate or commercial properties
As these assets are divested or sold off, the proceeds are then put back into the company to pay off debts or fund new projects.
Types of divestments
In order to define divestment, you must look at the different types.
Spin-offs: If a parent company owns a subsidiary, it might choose to distribute the subsidiary shares among its own shareholders. This causes the subsidiary to become its own company, eligible for listing on the stock exchange, offering a tax-free way to divest from the subsidiary.
Equity carve-outs: Another option for the parent company is to sell a percentage of the subsidiary’s equity to the public via the stock market. This is also a tax-free transaction, trading cash for public shares. At the same time, the parent company holds onto its controlling stake, so it doesn’t have to fully divest from the subsidiary.
Direct asset sales: The third option is the type most commonly used to define divestment. With a direct sale, the parent company sells its assets to another party. Because this is a cash transaction, it does involve tax consequences should the assets be sold for profit. To help mitigate the tax situation if your company is desperate for cash, you can sell assets below their book value.
Why do companies divest?
There are multiple circumstances in which a company might divest its assets, including voluntary and involuntary reasons:
To put a stronger focus on areas of the business making a profit
To boost cash flow by selling off underperforming business units
To ensure the business is following new government or environmental regulations
To generate additional value by creating two separate business entities
To make the business more appealing to investors for ethical or social reasons
Why do individual traders divest?
When looking at the divestment meaning, you’ll see that it doesn’t only apply to businesses. Individual investors can also apply a personal divestment strategy. This is when an investor chooses to sell off assets that no longer serve their financial goals or ethical beliefs.
There are a number of ways that individual investors might divest, including asking fund managers to avoid certain industries like tobacco or pharmaceuticals. An investor might close speculative positions on the market, or simply close an investment down. To this end, here are a few reasons why individuals divest:
The asset no longer holds potential for long-term growth
The position no longer matches personal viewpoints or moral standards
The asset doesn’t meet the individual’s wider social vision
Ethical trading is a growing trend, with investors wanting their funds allocated to companies that benefit society as a whole. As a result, this is one of the major drivers of divestment strategies for both individuals and businesses alike. Ultimately, the decision to divest boils down to your financial goals, personal vision, and overall investment strategy.
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