Divestment Strategies

Divestment Strategies Divestment strategy involves the sale or liquidation of a portion of business or a major  divisi division, on, profit profit centre or SBU. SBU. Divest Divestmen mentt is usuall usually y a part part of a rehabi rehabilit litati ation on or  restructuring plan and is adopted when a turnaround has been attempted but has proved unsuccessful. The option of a turnaround may even be ignored if it is obvious that divestment is the only answer. Reasons for divestment:

A divestment strategy may be adopted due to various reasons: 1. A busi busine ness ss that that had had been been acqui acquire red d prov proves es to be mism mismat atch ch and and can can not not be integrated within the company. Similarly, a project that proves to be inviable in the long-term is divested. 2. Persisten Persistentt negative negative cash flows from from a particular particular business business create create financial financial problems problems for the whole company, creating the need for divestment of that business. 3. Severity Severity of competi competition tion and the the inability inability of a firm firm to cope with with it may cause cause it to to divest. 4. Technologica Technologicall upgradation upgradation is requir required ed if the busines businesss is to survive survive but but where it it is not possible for the firm to invest in it, a preferable p referable option would be to divest. 5. Divestment Divestment may may be done because because by selling selling off a part of a business business the company company may be in a position to survive. 6. A better better alternat alternative ive may be availabl availablee for investm investment ent,, causin causing g a firm firm to divest divest a  part of its unprofitable business. 7. Divestment Divestment by by one firm firm may be part of of a merger merger plan executed executed with another another firm, firm, where mutual exchange of unprofitable divisions may take place. 8. Lastly, Lastly, a firm may may divest divest in order not not to attract attract the provision provisionss of the MRTP MRTP Act or  owing to oversize and the resultant inability to manage a large business. Approaches to divestment:

A firm may choose to divest in two ways. A part of the company is divested by spinning it off as a financially and managerially independent company, with the parent company retain retaining ing or not retain retaining ing parti partial al ownersh ownership. ip. Altern Alternati ativel vely, y, the firm firm may sell sell a unit unit outright. In the latter case, a ‘marketing concept’ approach is advisable where a buyer is found who may consider the divested unit (by the selling firm) to be a ‘strategic fit’. In this way, the likelihood of the unit being sold profitably is high. Decision to divest: The decision to divest is a painful one for the management as it amounts to admitting a failure. This is the reason why many firms fail to divest even though the strategic alternative is apparent. With an increasing pressure to streamline and the restructure  businesses and the emergence of professional management, divestment strategies have   become become quite quite popular popular in the Indian Indian indust industry. ry. Another Another reason reason why divestmen divestmentt is a

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 preferred option is the fact that several family business houses as well as public sector  companies in India have always been widely diversified. This made sense when licensing was prevalent and expansion opportunities were severely limited. Companies had no option but to diversify. With a wide-ranging portfolio of businesses, companies now face the problem of diffusion of core competencies. This is the reason why several companies in India are employing divestment as a strategy to streamline their business portfolio and emerge as a focused organization. Example:

Tata Group is a highly diversified entity with a range of businesses under its fold. They identified their none-core businesses for divestment. TOMCO was divested and sold to Hindustan Levers as soaps and detergents was not considered a core business foe the Tatas. Similarly, the pharmaceuticals companies of the Tatas – Merind and Tata Pharma  – were divested to Wockhardt. The cosmetics company Lakme was divested and sold to Hindustan Levers, as besides being a non-core business, it was found to be noncompetitive and would have required substantial investment to be sustained.

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