Definition: The Divestiture means the sale or disposition of certain company’s assets or a business unit which is not performing well and is disposed of either through closure, sale or bankruptcy. Thus, the divestiture involves some kind of contraction and is based on the principle which says 5-3 = 3! opposite of the principle of merger & acquisition which says, 2+2 = 5!.
The company divests with the intent to manage their asset portfolios. This means removing all those assets that are not contributing to the core business operations. As the business grows, a firm enters into several business lines due to which it is often difficult or impossible for a firm to focus on its core businesses. Thus, one of the reasons for employing the divestiture is to sell off the unrelated business units and restore the focus on the core business unit.
The Divestiture can be done in any of the following ways:
Sometimes, a firm finds that some of its business units are underperforming, so it can sell those units and reduce the operating losses. Also, with the divestiture, the firms can obtain funds that can be used to pay off the debts or can be used more wisely in the purchase of capital goods.