In business, a divestiture occurs when one entity wants to dispose of certain business assets by selling them off, exchanging them, or closing them. According to the Ernst & Young Global Capital Confidence Barometer, two-thirds of consumer businesses review their portfolios at least every 6 months, and 82 percent plan to complete a divestiture in the next two years.

While it’s never easy to make this decision, there are a variety of situations in which it might be the right choice to consider a divestiture. Below, we’ll discuss 6 reasons for divesting your business assets.

1. Bankruptcy

Companies that go bankrupt often cut their losses by divesting themselves of certain assets or subsidiaries as a business strategy. Divesting after bankruptcy can help organizations increase cash flow and lower their operating costs.

For example, in 2013 the photography company Eastman Kodak announced that it would sell some of its personalized imaging and document imaging business assets, after filing for bankruptcy the previous year. These assets are now part of the separate company Kodak Alaris.

2. Fundraising

Divestiture of less profitable assets and subsidiaries can also be used to help companies raise cash. This may be to help pay off debt, improve shareholder returns, stabilize financial leverage ratios, or a number of other reasons.

In 2019, for example, the retail group Ascena divested itself of its Dressbarn brand after persistent underperformance, shuttering hundreds of physical stores (Unfortunately, this move failed to stem the bleeding: Ascena is reportedly in talks to sell other brands such as Catherines and Lane Bryant.)

3. Lowering volatility

In addition to bankruptcies and fundraising for struggling companies, divestiture can also be used to head off potential trouble down the line, casting off assets and subsidiaries that have too much volatility and risk for the core business.

For example, the 2006 sale of Philips’ semiconductor business, which resulted in the independent company NXP Semiconductors, was reportedly due to “the volatility associated with the cyclical business-pattern of the semiconductor industry.”

4. Focusing on core business

Selling a subsidiary isn’t always a bad sign—in some cases, the company just wants to focus on its core business. “Pruning” the company portfolio can help reduce organizational complexity and raise funds for the next stage of expansion or change.

For example, in 2014 the pharmaceutical giant Merck divested itself of its Sirna Therapeutics business, which was studying a technology known as RNA interference. Merck CEO Kenneth Frazier commented soon after the announcement: “Our goal is for each of our priority businesses to be industry leaders… We must determine whether particular assets are core to our strategy.”

5. Unlocking value

In some cases, divestitures can help unlock greater value than selling off a single entity—just as stripping a car for parts and selling each one individually might be more profitable than selling the entire vehicle. Auctioning off each part to the highest bidder on its own can help companies get top dollar for assets such as real estate, machinery, and intellectual property. 

6. Antitrust issues

Rarely, a divestiture isn’t the result of the company’s own choice, but a necessity imposed due to antitrust concerns from regulators. Selling off certain subsidiaries during a merger or acquisition can help prevent monopolies and encourage competition.

In 2015, for example, the U.S. Federal Trade Commission required the grocery companies Albertsons and Safeway to sell 168 supermarkets across the country as a condition of their $9.2 billion merger. According to the FTC, these sales were necessary because the merger “would likely be anticompetitive in 130 local markets,” resulting in higher prices and lower quality for consumers.

Virtual data rooms (VDRs) can be tremendously valuable during the divestiture process. VDRs are secure online repositories for storing and sharing confidential and sensitive files with third parties, so that you don’t have to worry about data falling into the wrong hands. Start your free trial of SecureDocs today to see how easy it is to get your data room up and running.

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