Divestiture refers to the process of selling or otherwise disposing of a business unit or subsidiary of a company. Companies may choose to divest certain business units or subsidiaries for a variety of reasons, such as to focus on core operations, to raise capital, or to comply with regulatory requirements.
There are several types of divestiture:
- Sell-off: In a sell-off, a company sells one or more business units or subsidiaries to a third party. This is the most common type of divestiture .Legal actions stemming from anticompetitive or antitrust practices may also require a sell off.
- Spin-off: In a spin-off, a company creates a new, independent company by separating a business unit or subsidiary and distributing shares in the new company to its shareholders. Spin Offs typically occur when a unit is less profitable and unrelated to core parent business. The assumption is that the operations of the unit after a spin off are expected to have more value than they did as part of larger operation.
- Equity carve-out: An equity carve-out occurs when a subsidiary is made public through Initial Public Offering, thereby creating a new publicly listed company. Unlike a spin off, in which no cash comes to the parent company, the sale of shares in new company generate cash for the parent as well as providing the parent with a controlling interest in a subsidiary.
- Split-off: In a split-off, a company offers shareholders the option to exchange their shares in the parent company for shares in a newly-created subsidiary.
- Liquidation: In a liquidation, a company sells off its assets and distributes the proceeds to its shareholders.
Overall, the type of divestiture used will depend on the specific circumstances of the company and the business unit or subsidiary being divested. Companies may also use a combination of divestiture types to achieve their goals.
