DIVESTMENT

Divestment is a form of retrenchment strategy used by businesses when they downsize the scope
of their business activities. Divestment usually involves eliminating a portion of a business.
Firms may elect to sell, close, or spin-off a strategic business unit, major operating division, or
product line. This move often is the final decision to eliminate unrelated, unprofitable, or
unmanageable operations.
Divestment is commonly the consequence of a growth strategy. Much of the
corporate downsizing of the 1990s has been the result of acquisitions and takeovers that were the
rage in the 1970s and early 80s. Firms often acquired other businesses with operations in areas
with which the acquiring firm had little experience. After trying for a number of years to
integrate the new activities into the existing organization, many firms have elected to divest
themselves of portions of the business in order to concentrate on those activities in which they
had a competitive advantage.
An organization adopts the divestment strategy only when the turnaround strategy proved to be
unsatisfactory or was ignored by the firm. Following are the indicators that mandate the firm to
adopt this strategy:

Continuous negative cash flows from a particular division

Unable to meet the competition

Huge divisional losses

Difficulty in integrating the business within the company

Better alternatives of investment

Lack of integration between the divisions

Lack of technological upgradations due to nonaffordability

Market share is too small

Legal pressures

REASONS TO DIVEST
In most cases it is not immediately obvious that a unit should be divested. Many times
management will attempt to increase investment as a means of giving the unit an opportunity to
turn its performance around. Portfolio models such as the Boston Consulting Group (BCG)
Model or General Electric's Business Screen can be used to identify operations in need of

divestment. For example, products or business operations identified as "dogs" in the BCG Model
are prime candidates for divestment.
Decisions to divest may be made for a number of reasons:
MARKET SHARE TOO SMALL.
Firms may divest when their market share is too small for them to be competitive or when the
market is too small to provide the expected rates of return.
AVAILABILITY OF BETTER ALTERNATIVES.
Firms may also decide to divest because they see better investment opportunities. Organizations
have limited resources. They are often able to divert resources from a marginally profitable line
of business to one where the same resources can be used to achieve a greater rate of return.
NEED FOR INCREASED INVESTMENT.
Firms sometimes reach a point where continuing to maintain an operation is going to require
large investments in equipment, advertising, research and development, and so forth to remain
viable. Rather than invest the monetary and management resources, firms may elect to divest that
portion of the business.
LACK OF STRATEGIC FIT.
A common reason for divesting is that the acquired business is not consistent with the image and
strategies of the firm. This can be the result of acquiring a diversified business. It may also result
from decisions to restructure and refocus the existing business.
LEGAL PRESSURES TO DIVEST.
Firms may be forced to divest operations to avoid penalties for restraint of trade. Service
Corporation Inc., a large funeral home chain acquired so many of its competitors in some areas
that it created a regional monopoly. The Federal Trade Commission required the firm to divest
some of its operations to avoid charges of restraint of trade.
Divestment is not usually the first choice of strategy for a business. However, as product demand
changes and firms alter their strategies, there will almost always be some portion of the business
that is not performing to management's expectations. Such an operation is a prime target for
divestment and may well leave the company in a stronger competitive position if it is divested.
Reference
http://www.referenceforbusiness.com/management/De-Ele/Divestment.html

OIL PRICE VOLATILITY

PORTFOLIO REVIEWS

UNDERSCORES

THE

NEED

FOR

EFFECTIVE

The dramatic drop in oil prices during the second half of 2014 (crude has been down more than
50% since June) is forcing companies to re-evaluate their portfolios. Supplies in the United
States and Canada are at record highs, and global supply is outstripping demand with the
Organization of the Petroleum Exporting Countries (OPEC) unwilling to curtail production. As a
result, the economics of some oil and gas assets have become unattractive for their current
owners, creating opportunities for both buyers and sellers.
After a period of large-scale deal making and heavy capital investment upstream, such low and
volatile commodity pricing has exposed many flaws. Some assets that made sense under
different pricing assumptions are now stranded with owners who lack the cost structure or capital
resources to properly operate and exploit them. Companies without strong balance sheets can
divest these assets to fund capital investment in more promising areas or redirect resources to
return to profitability more quickly. Oil and gas executives were significantly more likely than
those in other sectors to indicate that a units weak competitive position was the trigger for an
asset disposition. Sellers in this sector are also most likely to be putting the proceeds back into
their core business. Regulatory and political pressures also are driving some companies to divest,
either to operate more effectively amid the turmoil in many regions or to address antitrust
concerns, such as Halliburtons ongoing effort to receive approval for its proposed US$35b
acquisition of Baker Hughes. Upon announcing the deal, Halliburton said it would divest
businesses that generate up to US$7.5b in revenues should regulators require this. Pressure by
activist shareholders has also been pushing many companies to re-examine their portfolios, a
trend that has been more prominent in the United States but is increasing globally.
In recent years, shareholders demanding more predictable returns have led many companies to
divest international and offshore assets and invest in more predictable ones onshore. Here as
well, however, decisions made under different pricing assumptions may have created portfolios
poorly aligned to the current pricing outlook and volatility. Activists are now pressing for asset
rationalization and exits from countries that are no longer profitable. More than a quarter of oil
and gas respondents said they had been targeted by activists in the last 12 months, with 80% of
these saying that activists had requested overseas exits. In the summer of 2014.

STEPS OF PROACTIVE DIVESTITURE

CONCLUSION
While divestments in the sector can be complex, those able to sell successfully report highly
positive outcomes. Oil and gas topped the sectors for a major divestment having had a very
positive impact on the company valuation, with 17% saying this compared with just 11% across
the sample.
Furthermore, almost 90% of respondents in oil and gas said that their most recent divestment had
met or exceeded valuation expectations, the highest figure for any sector except financial
services.