Divestitures

A prudent financial decision is one, which takes care of any eventualities during the investment. This includes management of organization during financial distress. So, in this lesson you will learn more about the financial distress.

Divestiture is the opposite of an acquisition. It is s sale of a group of operating assets for cash, securities or some other property (a subsidiary, a division, a business segment). The motives behind a divestiture are as follows

• eliminating unwanted assets (earning lower than required rates of return)
• regulatory considerations (antitrust)
• reversals of “mistakes” (reducing scope of activities)
• cash for debt reduction

There are several ways that a company can divest itself of a unit or subsidiary. It can announce that the unit is for sale, look for a buyer, or have an auction for the unit. A sale raises money for the parent company that can be used to support growth in its core business areas. Another method for selling a division of a company is an equity carve-out. In equity carve-out the parent company creates a new, publicly traded company out of one of its divisions and sells that stock to the public in an IPO (initial public offering). The parent may keep some portion of the stock. In some cases companies have carved out a division, kept 40% or 50% of the stock, and reabsorbed the division a few years later. Like a sale, an equity carve-out generates cash for the parent company.

If a company does not need cash, it can spin off a business unit to its share-holders. The division is turned into an independent company with publicly traded shares. Each shareholder receives shares in the new company proportionate to his or her owner-ship in the parent. If you owned 1 % of the parent company, you would receive 1 % of the shares of the new company in a tax-free transaction.

Examples of spin-offs include AT&T spinning off Lucent Technologies, Whitman Corporation spinning off its Midas Muffler chain, Hilton spinning off its gambling and casino properties into Park Place Entertainment, and Campbell Soups spinning off Vlasic International, famous for making pickles.