Investing is an exercise in buying things that you hope will bring more money back to yourself or a business over time. But there’s a flip side to investing. Sometimes you don’t want to hold onto that investment forever, in which case you might choose to divest.
What does divest mean?
Investing is an active strategy of buying assets that you expect to add value to a portfolio or company. But if your investments don’t work out, you need to be able to sell them again. Divesting is getting rid of an investment. It’s often referred to as divestment or divestiture.
For an individual, divesting can be as simple as exiting an investment position. For a business, divesting can get more complicated. Divestment might be the result of legal or regulatory action. For example, maybe a company is being broken up, or it needs to sell assets to pay creditors. However, sometimes businesses divest to increase the overall value of the company. A business may invest to cut dead weight or refocus its goals.
Why would an investor divest their holdings?
You may decide to divest assets in your personal portfolio if your investment thesis changes. Or perhaps you re-evaluate your moral beliefs on how you’re investing. For example, you may opt to shed companies that sell or promote nicotine products.
Generally there are three main reasons for committing to a divestiture:
- To raise money
- To optimise business/portfolio performance
- To increase resale value
The third is more relevant for companies looking to sell off individual units rather than the entire business for a higher market value.
Divesting isn’t always complicated. I went through a large divestment after I realised, I was dabbling far too much in industries I didn’t understand. I sold a large percentage of my portfolio to better align with industries I understood and wanted to be more involved with.
For corporations, divestment is more complicated than it is for you and me. A company may divest when it wants to free up cash to use elsewhere, sometimes to satisfy debts. Or a divestiture might occur when a company consolidates business functions.
Types of Divestiture
The main types of divestment are:
- Spin-offs: With a spinoff, a department or division of the company essentially becomes its own company. Spinoffs may happen as part of a merger or acquisition. Sometimes, they’re also a way to streamline operations or set a high-growth business free from a slower-growing one. Typically, spinoffs occur on paper only. Investors may receive shares of the new subsidiary in exchange for shares of the parent company.
- Split-ups: Similar to a spin-off, a split-up divestiture results in a new separate business entity being created. However, in this scenario, only the existing shareholders have the option to keep their existing shares or replace them with shares of the new business entity.
- Equity carve-outs: Like a spinoff, an equity carve-out often involves a subsidiary company that’s been broken apart from its parent company. But an equity carve-out involves a public sale of stock, allowing investors to buy shares of the subsidiary. The parent company retains a controlling stake in the subsidiary. It then uses this as an opportunity to fund further growth.
- Direct asset sales: In a direct asset sale, a company sells assets outright to outside companies. These assets can include real estate, equipment, or even entire subsidiaries or divisions. Done strategically, an asset sale can buoy other business operations. But some direct asset sales happen under duress. They may occur as the result of bankruptcy or another legal action. In that case, the company may have to sell these assets for far below fair market value.
Strategic vs forced divestitures
Regardless of the type of divesture, they generally come as a result of two situations: a strategy change or a forced transaction.
- Strategic – These are proactive decisions by management and are intentionally made to enhance focus and efficiency or to reallocate capital. For example, a company might sell or cut back on a non-core division to double down on a more profitable area of the business.
- Forced – Unlike a strategic divesture, forced divestitures are reactive. They’re most common when a company is under significant external or internal pressure, such as a change in regulation, legal action, or financial distress. Typically, these scenarios don’t give management teams a lot of time to explore options. And that can translate into offloading assets quickly, not always at a good price.
By investigating which situation a business is in, investors can gauge whether management is making a prudent, proactive pivot or whether there is deeper trouble that needs investigating.
ESG Divesting
In recent years, companies (particularly those in the energy sector) have begun divesting assets and operations based on ESG concerns. This trend can sometimes involve companies selling off profitable segments or investments that don’t align with shareholder or societal values. That’s because ethical investing isn’t always about maximising returns but aligning a portfolio with beliefs and long-term global sustainability.
Some examples of ESG divesting include:
- Fossil Fuels – some universities, pension funds, and individual investors have been exiting positions in companies with large exposure to oil, gas, and coal holdings. Companies seeking to retain shareholder capital may divest these types of assets and transition to alternatives to retain shareholder confidence.
- Social Impact – some investors actively avoid investing in companies with ties to weapons manufacturing, tobacco, or labour exploitation.
A real-life example of corporate divestment
In 2023, Shell (LSE:SHEL) completed its strategic divestiture (a direct asset sale) of its Nigerian onshore oil operations – a project that had long been plagued with community disputes, operational difficulties, and environmental challenges.
This move formed a small part of Shell’s broader strategy to reduce its carbon footprint and shift focus more towards offshore projects that produce a smaller carbon footprint. The proceeds from this sale were allocated towards cleaner liquefied natural gas projects. It also had the added benefit of mitigating the legal and reputational risks the company faced in the Niger Delta region of Nigeria.
This divestment case exemplifies a purpose-driven decision that helped Shell mitigate risk, enhance public perception, and focus on more sustainable long-term projects.