Published by MBA Skool Team, Last Updated: November 18, 2016
What is Divest Strategy?
Divest strategy means selling of your own assets, and it is also called divestiture. Divest strategy is implemented by companies in order to get funds quickly from a business which is anyways not a star performer for the company. It helps to liquidate that business & give some stability to the company. Divestment is basically the selling off non-performing subsidiary businesses in an organization.
Generally it is done for the following reasons:
• Due to change in corporate strategy: Changes in corporate strategy are decided by the top executives and board members. If they decide to sell a particular plant or subsidiary that is responsible for more losses then they sell the plant or subsidiary to some other party. By selling the subsidiary or plant now they can focus on their core business.
• To get funds quickly: Few firms may require capital either to expand their business or to pay the old debts. Therefore selling a less profitable asset will fetch they funds quickly.
• Due to social causes: Divestment may also happen due to social issue where firms are compelled to stop the business in an area and sell off the assets.
Example: Apartheid in South Africa led to shut down of many American firms present there.
• To increase stability in business: Sometimes firm go for divestment to reduce high fluctuations in the share prices.
For example: Philips sold its chip division since its performance was not stable which led to huge fluctuations in share prices of Philips.
• Sometimes firm sell their assets since they find the liquidated value of assets are higher than the worth of the firm.
• There might be regulatory bodies that might force the firms to divest.
The best way to find the assets that should be divested can be looking into its balance sheet and income statement and then plotting them on the BCG matrix. If according to BCG matrix, the assets lie in dog category then, it tie for divestment.
In marketing firms, divestment happens when a product line does perform well and has a narrow market share. For example, HUL sold its bakery division Modern bakery last year to focus more on its other FMCG goods.
Hence, this concludes the definition of Divest Strategy along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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