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What is a Divestiture?

Extensive divestiture from South Africa may have contributed to the eventual downfall of apartheid.
Cape Town, South Africa.
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  • Written By: Mary McMahon
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 August 2014
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Divestiture, also known as divestment, is the release, rather than the acquisition, of assets. It could be considered the reverse of an investment, and may be carried out for financial, state mandated, or ethical reasons. Assets can be divested slowly over time, or in a chunk, depending on which strategy works better for the company or institution doing the divesting. When a large stock holder engages in divestiture, it can dramatically change the face of the company being divested by breaking up the stock, and it can also send a powerful message.

The most common reason for a divestiture is a financial one. If a company is breaking itself up through a divestiture, it may be because the divested asset is worth more as a separate entity, or because divesting allows the company to redirect its focus to a primary market. This type of divestiture is undertaken with the consent of stock holders, and if a large company is splitting itself, it can have a profound impact on the market. A company or institution may also choose to divest assets which are nor performing well before they drag the overall investment portfolio down.

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The state may also mandate divestiture in order to prevent a monopoly. This is most common when a company wishes to acquire another asset. In the United States, the Federal Trade Commission (FTC) determines whether a company should be required to divest or not. The most famous instance of state mandated divestiture in the United States was the 1984 breakup of the Bell telecommunications group, which formerly controlled the majority of telecommunications in the United States. The FTC mandated the breakup into the American Telephone and Telegraph Company, along with seven smaller subsidiaries of the former Bell empire, identified by their regional affiliation, such as Pacific Bell and Atlantic Bell.

In some cases, divestiture may be undertaken for social or political reasons. In the 1980s, many humanitarian organizations encouraged companies to divest from South Africa, as part of the fight against apartheid. Universities and other public institutions are often encouraged to divest from controversial assets, both to separate themselves from questionable governments and to send a message to the companies and other governments which do business in or with those nations. Extensive divestiture from South Africa may have contributed to the eventual downfall of apartheid, and this wielding of economic power has encouraged other humanitarian organizations to encourage divestiture from nations like Sudan and other human rights violators.

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Discuss this Article

Spiffany
Post 2

@Nawaf - You might be right. Divestiture could be used to sell off the more unrelated or underperforming assets to other companies which have primary business interests in those unrelated sectors.

However, I'd think that divestiture should be used cautiously, because selling off parts of a company too hastily - without consideration of its effect on the parent organization and the operations of other assets/departments - could be harmful to the company, even with monetary gains from the sell.

Nawaf
Post 1

Could divestiture be used to help save us from financial crises?

It seems to me that using divestiture to sell off the more unrelated parts of a company in order to help that company pay off debt would work well, and also provide more diversification in the market of the sold off asset.

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