Question

Discuss the types and motivations for divestitures.

Answer 1

Divestiture is a process through which a company either partially or fully transfer or sell a certain division of a company or create a different division. There are basically four types of divestiture

· Spin-offs: Spinoff is a process through which a subsidiary is created but the ownership right remains with the parent company. When a sin-off is done the share of the subsidiary is normally divided to the parent shareholder on the pro-rata basis. The major motive behind doing a spin-off is when a division or a company has become slightly big enough and it can better be managed as a separate business entity.

· Split: Split is basically when you are dividing the company in two units. This is basically done to segregate the profit-making division and loss-making division. The major motive behind the split is that the profit-making division can be segregated from the loss making and the loss-making division could be sold out as a separate entity or closed down.

· Equity Carve out: Equity carve out is when a company share which are being held by the owners are being issued to public. Equity carve out is way to free up capital so that it can be used for other investment purpose. The major motivation behind equity carve out is to free up capital so that capital can be allocated to different business purposes.

· Disinvestment: Disinvestment is when a company is selling its stake or closing the investment because of losses mounting or consistent unfavorable economic environment. The major motive behind disinvestment is to close the business and take out the capital.