Divestment strategy tips and tricks for maximizing the value of the company

During the growing economic crisis, many companies are faced with the problem of low efficiency in the use of their assets, in connection with which the divestment of assets and its impact on the value of the company is becoming an increasingly urgent topic.

Divestment strategy – the second form of enterprise reorganization

Divestiture refers to the sale of part or all of the assets or business units of an enterprise. Diversions are as much a value creation tool as an investment. There are various reasons for an entity to make a divestiture decision, including:

  • changing the strategy of the enterprise;
  • sale of non-core or unprofitable assets or business units during mergers and acquisitions;
  • increase in the value of shares due to the release from unprofitable assets and business units;
  • to comply with the norms of antimonopoly legislation;
  • a difficult financial situation and an urgent need for funds to pay off the debt;
  • restructuring of the enterprise with the aim to return to core business.

A change in the company’s strategy is one of the main motives for divestiture. A divestiture can accompany mergers and acquisitions. Assets or business units that do not provide the minimum acceptable level of profitability set as a threshold value at the corporate level are recognized as candidates for divestment.

Solving the problem of unsatisfactory profitability of individual assets or business units through their dissolution or sale helps to increase the return on invested capital, thereby having a positive effect on the financial condition of the enterprise and, accordingly, on the market value of shares.

How to maximize the value of the company via divestment strategy?

Money received from the divestment of assets or business units can be invested in earning securities or projects; aimed at acquiring new assets or business units; to increase dividends or buy back the company’s shares.

Divestment can also be used as a measure against the takeover of an enterprise. The sale of some assets or individual business units can reduce the attractiveness of the enterprise – the object of capture. The divestiture decision may be forced if the company has an almost monopoly supply on the market, which is contrary to the provisions of the current antitrust legislation. In this case, the divestment of assets or business units weakens the position of the enterprise and thus returns it to the legal field. Enterprises resort to divestment if they have an urgent need for cash to pay off debt obligations in the absence of other sources of debt repayment. With the help of divestment, an enterprise can get rid of non-core assets and business units if, for some reason, their further use is considered inappropriate. In this case, divestment is aimed at returning the enterprise to its core business.

Divestment can be carried out using the following methods:

  • liquidation (voluntary or forced);
  • partial sale of assets;
  • transfer of shares;
  • the allocation of part of the equity capital.

After making decisions on divestiture, it is necessary to prepare an offer for the sale of the company’s assets. For this, preliminary documentation is formed in Virtual Data Rooms virtual-data-room.org, including information about the organizational structure of the enterprise; its financial position; structure, and state of production and marketing. To make a final decision on the acquisition of diversified units (assets put up for sale), a potential buyer may request additional information that allows a detailed assessment of the terms of the transaction. In this case, Data Room software serves as a secure workspace for collaboration, file-sharing, and storing sensitive data.