When the subject matter is corporate growth, the topic of investment is rarely far off.
But rarely is that the case for disinvestment, the process through which companies and governments liquidate rather than invest in assets and subsidiaries.
DealRoom stands behind strategical disinvestments and divestitures of hundreds of companies, and in this article, we look at the topic of disinvestment and explains how it too can fuel corporate growth.
How Does Disinvestment Work?
A disinvestment process begins with the decision (or directive) to sell an asset or subsidiary or stakes thereof.
This effectively means that, whenever the company or government in possession of the asset or subsidiary decides to sell, a disinvestment occurs. This is an important point to note: For every investment in an asset or subsidiary, there has to be a disinvestment decision at the other side of the transaction.
Types of Disinvestment
Whether or not the organization initiating the disinvestment is a corporate or a government entity, the motive behind a disinvestment falls into one of four categories.
These are as follows:
If the organization believes that a sale of the asset will leave them in a better position strategically or financially, they will be motivated to sell. The most common example of asset maximization is that of companies disinvesting from non-core assets to focus on their core areas of business.
Government agendas often create the climate for disinvestment of government assets (referred to as privatization). For example, in Europe in the 1980s and 1990s, there was a wave of privatizations of government-held assets in industries such as transport, energy, and telecommunications.
When companies invest in some assets, the legal terms of those acquisitions may obligate them to disinvest assets elsewhere. For example, when the anti-monopoly regulator agrees to two large industry rivals merging, it may be on the grounds that some parts of the business are disinvested to maintain some level of competition.
When a company (or government) receives an offer for its subsidiary or asset which merits consideration, it may ultimately deem the offer too good to turn down, leading to an opportunistic disinvestment. An example of such an offer would be a sale which values an underused asset far in excess of its market value.
In terms of the different ways that companies and governments can close these transactions, the following list is exhaustive but not exclusive:
- IPO: Whereby the subsidiary or asset is listed on the stock exchange.
- M&A transaction: The sale of the subsidiary or asset to a third party buyer. This could include spinoffs and carve outs.
- Privatization: The case where a government announces that it is to sell a public asset, usually through a public sale of the company’s shares.
Example of Disinvestment
Let’s look at the examples of two divestments, one of a company and one of a government.
The case of General Electric (GE) selling off several divisions over the past decade to focus on its core industrial business is a prime example of a corporation looking to streamline its operations through disinvestments. In June 2021, it disinvested its jet leasing business to AerCap to pay down $30 billion in debt and to strengthen its balance sheet.
In 1997, the UK government was obligated, by EU directive, to privatize its interest in Great Britain’s national railway network, then known as British Rail. As part of the sale, shares were sold to the general public, and several franchises were awarded separate routes and regions to operate.
The disinvestment of a business or asset can lead to just as much value creation as that of an investment.
Freed of the shackles of an unwanted asset, a company or government with a good strategy in place, can use the cash received for the asset for more productive means.
Talk to DealRoom today about how we can put you on the right track for disinvesting from some of your company’s assets.