How often have we heard that to progress in life, we need to let go of the past—let go of the things that no longer serve us? In the world of business, the concept of letting go takes the form of divestment. For decades, organizations have divested non-performing assets using a well-thought-out divestment strategy to reverse losses or explore alternative areas of investment. Here we examine its ins and outs.
What Is A Divestment Strategy?
A divestment strategy, also known as a divestiture strategy, is a retrenchment strategy deployed by organizations to scale down the range of their business activities. Divestment involves sale of an organization’s business assets, divisions or subsidiaries in an effort to streamline operations and improve financial health. Sometimes, it also includes separating a struggling division from the parent organization and establishing it as an independent entity—also known as a spin-off.
As organizations expand, they sometimes find it difficult to pay equal attention to all of their business arms. Therefore, they opt for a divestment strategy to not only remain focused on their major areas of operation but also drive revenue in the process. A divestment strategy is the way to go when a particular business line doesn’t perform to expectations and becomes a liability instead of an asset.Organizations may also turn to a divestiture strategy to prevent insolvency, reduce debts and maintain a low debt-to-equity ratio.
Importance Of A Divestment Strategy
A divestiture strategy is crucial to making correct divestment decisions. Here we look at a few ways in which a divestment strategy is important:
1. Lowering Debts
Lack of profitability can cause an organization to incur significant debts and push it toward bankruptcy in the worst-case scenario. A divestment strategy can be a saving grace in such situations, allowing the organization to identify its least-profitable assets and sell them off to reduce costs, improve cash flow and pay off debts.
2. Increasing Transparency
A divestiture strategy can benefit organizations that have a diverse range of assets spread across multiple locations. It offers transparency and valuable insights into business operations, helping organizations identify which of their assets are ready for divestment and are most likely to deliver maximum value from the divestiture. Organizations are also able to effectively review their portfolios through a divestment strategy.
3. Reallocating Funds
When implemented right, a divestment strategy allows an organization to free up funds and reallocate these toward the most profitable areas of business. Some organizations may also opt to reinvest the released funds in shares or use them to acquire new assets better aligned with their core competencies.
4. Attracting Investors
A divestment strategy helps attract investors, highlighting an organization’s redefined areas of focus and its future growth prospects. Evidence shows an organization’s stock prices rise faster after a divestiture. Organizations that divest 20% of their businesses experience better growth in the market compared to organizations that divest only 5%.
A divestiture strategy, when adopted during a recovery period, can generate greater shareholder returns. It helps organizations readjust theirbusiness models, remain relevant in a competitive landscape and consistently increase profits in the long run.
Divestment Strategy Example
A telecom company is seeking to combat the economic disruption brought on by the COVID-19 pandemic by selling off its logistics division. After a series of brainstorming sessions, they come up with a divestment strategy that involves:
- Identifying the firm’s core processes
- Reviewing the performance of the division based on the identified core processes
- Analyzing the relevance of the division to discern its value
- Looking for prospective buyers in the market
- Examining the future of the firm in terms of the proposed divestiture
- Preparing a de-integration plan for the divestment
- Conveying the purpose of the divestiture and its estimated benefits to internal and external stakeholders
This is a divestment strategy example. Leveraging this divestiture strategy allows the telecom firm to successfully execute the divestment,monetize non-functional assets and improve capital.
Stay Ahead Of The Game
The EY India Corporate Divestment Study 2021 highlights that organizations are increasingly looking at divestments as a way to build funds from non-strategic assets in the light of COVID-19. As much as 74% of organizations say they intend to divest in the next two years, while 40% plan to accelerate their divestment strategy. Leaders and decision-makers are going to be instrumental in planning and successfully executing a divestment strategy to meet business needs.
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