Disinvestments, also known as divestments, are processes utilized by companies when there is a need or desire to initiate a reduction in capital investment. Essentially functioning as the polar opposite of an investment, the process of divestment involves selling off current investments in order to generate assets that can be used to better advantage in some other manner. Businesses sometimes use disinvestment as a means of changing the direction of the company in order to meet changing consumer needs and remain competitive.
One of the easiest ways to understand divestment is to think in terms of a company that has successfully produced a product for many years. However, changing technology is shrinking the demand for the company’s product. A new product is developed that is anticipated to recapture the interest of consumers. However, this will leave the company with several physical facilities and a great deal of equipment that is not required for the production of the new product.
In order to generate revenue that will aid in the manufacturing of the new product, the company will undergo a period of disinvestment. The plants and other facilities that are no longer required for production are sold off, along with the now obsolete equipment. By generating income from the sale of these divested holdings, the company creates resources that constitute a capital investment in the new product.
At times, a company may choose to sell off a subsidiary or business unit as part of a disinvestment strategy. Doing so allows the company to begin the migration from focusing on one market sector to a different sector that holds more promise. In some cases, disinvestment involves selling the business unit to another company. At other times, the business unit is spun off into a separate company altogether.
Disinvestment can also occur when there is a decision to make changes in the regulation of an industry. Perhaps the most well known example of this type of disinvestment application would be the deregulation of the communications industry in the United States during the 1980’s. As part of the process, the Bell System was completely divested and emerged as eight different entities: the new AT&T, and seven regional Bell companies that were known collectively as the Baby Bells.
Because disinvestment does involve the sale of resources, companies often look very closely at the process before actually implementing any type of divestiture action. It is important to make sure that the investments that are released are not likely to be required in the future, and that the revenue generated from the sale of the investments is highly likely to result in increased profitability for the company in the long run.
