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CFO Fundamentals: Your Quick Guide to Internal Controls, Financial Reporting, IFRS, Web 2.0, Cloud Computing, and More by ALLISON I. SHIM, JOEL G. SIEGEL, JAE K. SHIM

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CHAPTER THIRTY-SEVEN

Divestiture

THE DIVESTITURE OF business segments by corporations has become an accepted strategy for growth rather than diversification. Divestiture involves the partial or complete conversion, disposition, and reallocation of people, money, inventories, plants, equipment, and products. It is the process of eliminating a portion of the enterprise for subsequent use of the freed resources for some other purpose. A divestment may involve a manufacturing, marketing, research, or other business function.

WHY DIVEST?

A business segment may be subject to divestiture if:

  • It does not produce an acceptable return on invested capital.
  • It does not generate sufficient cash flow.
  • It fits in with the overall corporate strategy.
  • The worth of the pieces is greater than that of the whole.

Resource allocation becomes an important consideration in a diversified business. These resources include not only capital but also management talent. If management finds itself spending an excessive amount of time and energy on one segment of the corporation, that segment may be a candidate for divestiture. Then those resources can be redirected to the growing segments of the business. However, this operation also requires the attention of management.

What are the objectives and types of divestitures?

The usual objectives behind divestiture are to reposition the company in a market, raise cash, and reduce losses. The other alternatives to divestiture are liquidation and bankruptcy. There ...

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