What is divestment? Divestment is simply the sale of all or part of the capital by a company or organization in another company. This can happen for various reasons, from corporate restructuring to focusing on key business areas. In this article, let's dive deeper into the concept and main causes of divestment with Viindoo.
1. What is divestment?
Divestment is the process by which a business divests its investment in a company or organization by selling it back to a third party. This usually occurs when a part of a subsidiary is not performing as expected, or to invest in key areas of the company's operations and to reduce investment risk.
In the field of investment, capital divestment is also used when entities such as investors or individuals want to withdraw their investment capital. This capital can be used for other purposes of the company.
2. Some current forms of divestment
Currently, there are three common types of capital degradation on the market:
- State divestment: Government/State organizations withdraw capital or liquidate investment capital from subsidiaries in order to reallocate resources to more profitable business activities or to finance projects—support from the Government. The divestment of State capital also has a positive impact on the stock market, namely creating a growth engine and attracting investors.
- Stock divestment: used when the parent company wants to share shares from its subsidiaries to shareholders and these companies can still be traded on the stock exchange.
- Equity divestment: is a form of an individual or organization investing in a joint stock company, then selling their investment to another party.
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There are 3 forms divestments as follows:
- Split: Applicable in cashless and tax free transactions. Parent companies will distribute shares to subsidiaries, helping the subsidiary to become an independent company
- Initiating sale - divestment in securities: Used to grow the subsidiary and increase the company's share price by selling controlling shares of the subsidiary on the stock exchange.
- Direct asset sale: The parent company sells real estate, equipment, or a subsidiary to another party.
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3. What is the reason for the divestment of the enterprise?
Cause What is capital degradation? Divestmentsis a process that is not only negative, but also seen as an opportunity for the business to focus on more profitable core activities. The divestment can be done in many forms, from active divestment to passive divestment due to factors such as social, political, shareholder pressure.
The most common causes for divestment include the sale of business divisions that are not the core business of the business. Some large enterprises run many different business units, sometimes the management process is difficult and does not focus on the core values of the business.
Divesting a few unnecessary business units frees up essential time and capital for the parent company to focus on its expertise. This is divestment of equity and help businesses focus resources on key activities with higher profits. In addition, businesses can sell assets or shares to create capital and ensure benefits when business operations are not as effective as expected.
Another cause of divestment is when the total value of a company's individual assets is greater than the market value of the company's combined assets. This incentivizes companies to sell off assets that are more valuable when liquidated than when held. However, divestment can also be passive when the business is under pressure from other factors such as social, political, and shareholders.
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4. Some practical examples of divestment
4.1 In Vietnam
Some examples of divestments in practice include:
In 2019, Vietnam Airlines divested from 3 subsidiaries, including Vietnam Air Ground Services, Vietnam Aviation Corporation and Vietnam Airlines Engineering Company to focus on investing in its main business.
In 2022, Vietnam Airlines divested from Cambodia Angkor Air to receive 35 million USD, equivalent to more than 800 billion VND. This helps Vietnam Airlines to reduce losses and get rid of the delisting sentence because of negative equity.
In 2020, Masan Group divested from FPT Retail by selling a 24.9% stake to a foreign investor. This helps Masan Group focus on its main business of producing food and beverages.
In 2018, PetroVietnam divested from two subsidiaries, including Binh Son Refining and Petrochemical Company and PetroVietnam Power Corporation. This divestment helps PetroVietnam focus on its main business of oil and gas exploration and production.
In 2019, Vingroup divested in Vinmec and Vinhomes, by selling shares to foreign investors. This divestment helps Vingroup focus on its main business of real estate and automobile manufacturing.
4.2 In the world
In the 1970s and 1980s, a number of companies such as Eastman Kodak, Coca Cola, IBM, General Electric and Xerox carried out a capital divestment in protest against the apartheid regime of the white government that ruled in South Africa. In 1987, the state of California divested $90 billion from companies doing business with South Africa.
Some religious organizations also view divestment as a moral obligation. Specifically, the general assembly of the Presbyterian church (USA) made capital calls from corporations doing business with Israel. In 2006, the genocide in Sudan caused a series of organizations such as Illinois, Oregon, etc. to pass laws requiring public pension funds to divest from companies operating in Sudan. In addition, a number of higher education institutions, including the University of California, Harvard University, Amherst College, Yale University, and Stanford University, have adopted policies to divest their portfolios into public companies. company doing business with Sudan.
Hope this article by Viindoo helped you better understand the concept of "What is divestment?” and the causes of this process. A divestment can benefit a business by focusing resources on more profitable key activities or generating new capital.
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