Divestiture

A divestiture is the general term for a company disposing of a business it owns. In practice it usually means a trade sale: a buyer is found, pays cash, and control passes. It sits alongside two other routes, a spin-off, where shares in the business are distributed to the parent's own shareholders and no cash arrives, and the sale of a minority stake to public investors, which raises cash while the parent keeps control.

The cleanest argument for selling a profitable business is the best owner test, which is the acquisition test read backwards. A business belongs with whoever can generate the most value from it. If another company has distribution the division lacks, or an adjacent asset that only works in combination, its synergies exceed the current parent's and it can pay more than the business is worth inside the group. Selling at that price creates value even though nothing about the business has deteriorated.

The other reasons are more ordinary and just as common: freeing management attention and capital for the businesses the group intends to compete in, funding something else or repairing a balance sheet, exiting a business whose capital intensity the group cannot keep funding, satisfying a competition authority that has required a disposal as the price of clearing another deal, and answering an activist arguing that a portfolio is being discounted by the market.

The complication is that most divisions cannot be separated by signing a contract alone. Where the business has never operated independently, the divestiture becomes a carve out, and the difference between the profit it reported inside the group and the profit it will earn alone becomes the central negotiation.