Divestment - Motives

Motives

Firms may have several motives for divestitures.

First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak, Ford Motor Company, Future Group and many other firms have sold various businesses that were not closely related to their core businesses.

A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.

A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.

A fourth motive to divest a part of a firm may be to create stability. Philips, for example, divested its chip division called NXP because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.

A fifth motive for firms to divest a part of the company is that a division is under-performing or even failing.

A sixth reason to divest could be forced on to the firm by the regulatory authorities, for example in order to create competition.

Read more about this topic:  Divestment

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