For an excellent video regarding divestiture, which is a component of Article 3 (“Six Flags to Sell Seven of Its Parks”) of this newsletter, please see the video, Understanding Divestiture: Definition, Reasons, and Examples,  and its accompanying article below.

What Is a Divestiture? 

According to the article, a divestiture is the partial or full disposal of a company or other entity's operations or assets through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a company's core competency. 

A divestiture may also occur if a business unit is deemed to be redundant after a merger or acquisition, if the disposal of a unit increases the sale value of the firm, or if a court requires the sale of a business unit to improve market competition. 

An In-Depth Look at Divestitures 

Technically, the offloading of any asset, such as intellectual property rights, real estate, a piece of machinery, or something else an entity owns, can be categorized as a divestiture. However, the term is often used primarily in reference to business units, which represent more significant disposals. 

Why would a company divest a business unit? There are various reasons, and it is not necessarily always voluntary. 

As companies grow, they may find they are in too many lines of business and must close some operational units to focus on more profitable lines. Many conglomerates face this problem. Companies may also sell off business lines if they are under financial duress. For example, an automobile manufacturer that sees a significant and prolonged drop in competitiveness may sell off its financing division to pay for the development of a new line of vehicles. 

Divested business units may be spun off into their own companies.

Alternatively, an entity may be forced into divesture because of bankruptcy or to ensure a merger or acquisition satisfies competition laws. Regulatory authorities may agree to let a company buy another company provided that it sells one of its business units first if owning that unit on top of the new operation would give it an unhealthily large amount of market share. 

By divesting some of its assets, a company may be able to cut its costs, repay its outstanding debt, reinvest, focus on its core business(es), and streamline its operations. This, in turn, can enhance shareholder value.

Governments may also divest interests or property through privatization to raise money to pay debts or allow private sector profits.

Top Reasons Companies Choose to Divest 

There are many different reasons why a company may decide to sell off or divest itself of some of its assets. Here are some of the most common ones: 

  1. Bankruptcy: Companies that are going through bankruptcy will need to sell off parts of the business.
  2. To cut back on locations: A company may find it has too many locations. When consumers just aren't coming through the doors, the company may be forced to close or sell some of its locations. This is especially true in the retail sector, including in fashion, banking, insurance, food service, and travel.
  3. To sell losing assets: If demand for a product or service is weaker than expected, a company may need to sell it. Continuing to produce and sell an underperforming asset will cut into the company's bottom line and eventually force management, under pressure from shareholders, to conclude that its resources need to be put to better use, such as by concentrating on areas of the business that are performing well. Company bosses are tasked with putting the company's capital to work in the best way possible, which often means being ruthless and chasing opportunities with the highest prospective return on investment (ROI).
  4. To raise funds: Companies need funds for various reasons, like investment, expansion, or paying off large debts or fines. Usually, money is raised from equity or debt. However, there may be cases where these options are not available, or management believes it can get a better return from selling off assets.
  5. Political divestiture: Companies may divest from certain assets due to political or ethical liabilities. Examples include the movement to divest from fossil fuels, or the movements to divest from geographies that are politically controversial, like Israel or Russia. For example, Boycott, Divestment, and Sanctions, an activist group, is calling for divestment by international companies from Israel for what they describe as its "oppression against Palestine."
  6. To comply with regulators: Governments generally encourage competition in markets as it gives consumers options and theoretically helps keep prices lower. If a company gains too much power and market share, regulators may force it to divest assets to restore balance. For example, if a company with an already strong hold of a market agrees to acquire another company in that same market, regulators may intervene and only let the deal go ahead if the acquirer sells one of its divisions.

Government regulation may require corporations to divest some of their assets, especially to avoid a monopoly.

Real-World Divestiture Examples 

Divestitures can come about in many different forms, including the sale of a business unit to improve financial performance and due to an antitrust violation. 

Meta-Giphy Sale

In 2023, Meta (formerly Facebook) sold the animation database Giphy to Shutterstock for $53 million, which represented an 83 percent loss on what it paid for Giphy just three years earlier. The sale was forced by U.K. regulators, who believed that Facebook's acquisition of the gif-animation platform represented a violation of the country's antitrust laws.

Kellogg Split

In 2022, foods manufacturer Kellogg announced its plans to split into three separate companies, spinning off its cereal and plant-based food brands. While the legacy Kellogg's company will focus on the frozen breakfast and snack foods that bring in 80 percent of the old company's revenue, the spin-offs will focus on the cereal markets and plant-based foods.

What Happens to Employees in a Divestiture?

When a parent company divests part of its business, there may be some overlapping employees who ordinarily perform work for both entities. When that happens, the company will have to decide which employees will move into the new entity and which will remain part of the parent company. In addition, if the divested entity is purchased by another company, there may be layoffs at the new company. It is important for companies to be transparent about their divestiture plans.

What Led to the AT&T Divestiture in 1982?

One of the most famous cases of court-ordered divestiture was the breakup of the old AT&T in 1982. 

The U.S. government determined AT&T controlled too large a portion of the nation's telephone service and brought antitrust charges against the company in 1974. The divestiture created seven different companies, including one retaining the name AT&T, as well as new equipment manufacturers.

The Bottom Line

A divestiture happens when a company sells part of its business or spins it off into a new entity. Companies may divest to focus on a core competency, raise cash, or reduce exposure to an underperforming business segment. They may also divest due to regulatory pressure if the combined entity has too large a market share. 

Key Takeaways

  1. Divestiture involves selling, exchanging, or closing parts of a company to focus on core competencies or reduce financial stress.
  2. Companies may divest due to mergers, acquisitions, or regulatory pressures to enhance competition and limit market dominance.
  3. Divestitures help companies cut costs, repay debt, and enhance shareholder value by focusing on profitable business segments.
  4. Businesses often sell assets under financial duress or to raise funds for investment or debt repayment.
  5. Divestiture can result from political or ethical pressures, as seen in movements to divest from controversial regions or industries.

 

Discussion Questions

  1. This article addresses several reasons why a divestiture might occur. What are those reasons? Which of these reasons relate(s) to the Six Flags’ divestiture?

    As mentioned in the article, there are numerous reasons why a company may decide to sell off or divest itself of some of its assets, including: (1) bankruptcy; (2) to cut back on locations; (3) to sell losing assets; (4) to raise funds; (5) political divestiture; and (6) to comply with regulators. Although the article provides incomplete information in term of why Six Flags chose to sell seven of its amusement parks, the reasons likely include numbers (2), (3), and (4). 

  2. In terms of the standing of a company like Six Flags (see Article 3— “Six Flags to Sell Seven of Its Parks”) that engages in divestiture, is divestiture a sign of weakness, or is it a sign of strength?

    In some respects, “the beauty is in the eye of the beholder” in the Six Flags case—in other words, the perceptions of why Six Flags has chosen to sell seven of its parks are subjective and vary from person to person. Your author views this predominantly as a sign of weakness. Amusement parks are Six Flags’ core business, and by selling seven of its 41 parks, the company is shedding approximately 17 percent of its core holdings.

    With that being said, if the seven parks are underperforming, ridding Six Flags of those parks and using the cash strategically could actually be a sign of strength. As Six Flags said in a statement included in Article 3 of this newsletter:

    “(T)his decision (to divest the seven parks) allows Six Flags to invest more deeply in the parks with the greatest opportunity for growth and innovation. We'll be better positioned to invest in new rides and attractions, upgrade park infrastructure and technology, enhance the guest experience with more immersive entertainment and introduce innovations that make every visit even more memorable.”

  3. In your reasoned opinion, is Six Flags’ divestiture of seven of its theme parks (see Article 3— “Six Flags to Sell Seven of Its Parks”) a good business decision, or is it a poor business decision? Explain your response.

    This is an opinion question, so student responses will likely vary.

    In your author’s opinion, this will only be a good business decision if it translates into positive results for Six Flags, and that is yet to be determined.