Definition of corporate divestiture

Corporate divestiture is a strategy to remove some of a group’s assets under its current business portfolio. Depending on the purpose of restructuring, divestitures can take several forms, such as sell-offs, spin-offs, or equity carve-out. The term corporate divestiture is usually interchangeable with that of corporate divestment.

One of the most common reasons for divestiture is removing underperforming business units. This should help reduce operating losses and achieve higher organisational efficiency. Through corporate divestiture, firms are also able to obtain funds, allowing them to pay off some debt and use capital more wisely in other operations.

Many groups employ corporate divestiture with an aim to restore focus on their core businesses through the selling off of unrelated business units. Managers of firms might be motivated to divest business assets that operate in highly volatile or unstable market conditions in order to reduce their own employment risk.

Finally, some corporate divestiture can be forced. For example, regulatory authorities might use legal action to demand a divestment from a company due to antitrust or anticompetitive practices. 

Example

A company can experience decreased financial performance when its business portfolio is over-diversified after a series of mergers and acquisitions. When that occurs, managers might perform corporate divestiture through sell-offs or spin-offs in order to improve performance and restore focus on the company’s core business. A prominent example is PepsiCo Inc, which expanded rapidly from the late 1970s to the mid 1990s through the acquisition of several non-core business lines. Eventually PepsiCo had to sell and spin off several of them - including Pizza Hut, KFC, and Taco Bell - during the late 1990s in order to maintain its focus on snack food and beverages. [1]

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