Divestment Strategies

Divestment strategy involves the sale or liquidation of a portion of business or a major

division, profit centre or SBU. Divestment is usually a part of a rehabilitation 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 business that had been acquired proves to be mismatch and can not be
integrated within the company. Similarly, a project that proves to be inviable in
the long-term is divested.
2. Persistent negative cash flows from a particular business create financial problems
for the whole company, creating the need for divestment of that business.
3. Severity of competition and the inability of a firm to cope with it may cause it to
divest.
4. Technological upgradation is required if the business is to survive but where it is
not possible for the firm to invest in it, a preferable option would be to divest.
5. Divestment may be done because by selling off a part of a business the company
may be in a position to survive.
6. A better alternative may be available for investment, causing a firm to divest a
part of its unprofitable business.
7. Divestment by one firm may be part of a merger plan executed with another firm,
where mutual exchange of unprofitable divisions may take place.
8. Lastly, a firm may divest in order not to attract the provisions of the 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
retaining or not retaining partial ownership. Alternatively, the firm may sell a 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 quite popular in the Indian industry. Another reason why divestment is a

1
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 non-
competitive and would have required substantial investment to be sustained.