Both private and public organizations choose to divest or disinvest assets for many reasons. One of the most common reasons for both is to raise capital. Other common reasons include social or political pressures from third parties. There is very little difference between divestment and disinvestment, and both achieve the same goal of reducing and not replenishing capital.
When a company divests, the company disposes of part or all of its business. Divestments commonly occur when a particular division of a company does not live up to its expectations. This can result from financial reasons or because the division has violated the principles of the parent company. Another common reason for divestment is social pressure placed on a company conducting business in or with a country that has an unfavorable political climate.
Disinvestment, also known as divestiture, occurs when an organization liquidates or sells part of its assets or an entire division without the intent of reinvesting in it. The divestiture typically occurs so that the organization can use the assets to improve another division. A disinvestment can occur with the sale of capital goods or closure of a division.
Process of Disinvestment
An organization can disinvest or divest assets by transferring complete management of a division to another enterprise. Although this is not a complete divestiture, this transfer can often meet the social criteria for a company to pull out of a particular business. Another method is to liquidate shares of the company while retaining majority control through ownership of 51 percent of the remaining shares. However, in most cases companies will directly liquidate all assets, resulting in a complete divestiture.
Advantages and Disadvantages
A company can choose to divest for a variety of reasons. Regardless of the ultimate reason, this process will generate revenue that can be used elsewhere in the organization. In the short run this increased revenue will benefit most organizations. However, a company that divests for political or social reasons may lose revenue as a result of divesting a profitable asset or division.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008