Corporate Divestiture Management
Corporate Divestiture Management
2 Foundations for understanding the divestiture phenomenon under analysis (S. 28-29)
This chapter is intended to help sharpen understanding of the divestiture phenomenon dealt with in this project. What characterizes the specific divestiture option being analyzed? Are divestitures a relatively new phenomenon, and how did it evolve? Where do divestitures fit within strategic management, and what are the implications?
2.1 Definition and scope of the term
Trying to access the term via its impact, "divestiture" and "to divest" suggest the opposite of "investment" and "to invest". When contemplated as a negative investment, divestitures cancel the financial and business impact of investments (cf. Wöhler 1981, p.8). However, definitions of investment vary in the literature (see, e.g., Eich 1978, p.828ff., Priewasser 1972, p.11-18). As this study neither aims to develop a general, binding definition of the term nor discuss all related concepts from previous literature, the focus here is on presenting a definition that sharpens the scope of analysis. Releasing financial and business resources can happen gradually, cashing out through the sales process, i.e., "partial divestiture", or through a definite one-time act, potentially including the receipt of directly related proceeds, i.e., "residual divestiture" (cf. Wöhler 1981, p.16).
Although "cash-out" or "harvesting" strategies eventually have a divestiture effect, they do not focus on the disposal but on the optimization of future related cash-flows (cf. Harrigan 1989, p.40ff.). In practice, cash-out activities can thus also be found without final discrete decisions on respective market exits. The degree of strategic relevance is strongly related to the scope of the divestiture object itself. In the case of whole subsidiaries - business units, for instance - divestiture considerations are the responsibility of corporate management. Business portfolio matrices coined the term "divestiture strategy", which stands for the disposal of businesses or strategic business entities (SBE) operating in specific markets (Duhaime/Patton 1980).
This characterization factors out the release of smaller assets, such as single plants or patents, or the sale of capital stakes and financial investments. Furthermore, divestitures could be partial or complete, the key difference being the resulting degree of change of ownership. To differentiate business unit disposals here from practices like franchising and outsourcing, the degree of sustainability and accrual of financial funds also need to be considered.In terms of underlying reason and logic for divestiture, voluntary and involuntary divestitures can be differentiated. In the latter case, a corporation can be forced to divest, typically for nationalization or regulatory reasons.
Voluntary decisions could take place in a proactive manner, seizing strategic opportunities, or reactively in the face of concrete problems or even crises. For this study the focus is on a) voluntary, residual divestiture decisions, including organizational entities like entire business units, divisions and segments, which can be b) permanently unbundled as self-dependent business entities under c) new ownership: