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What Is a Divestiture?

When a company is looking to get rid of some of their operations, they will go through something called a divestiture. You’ve done awful, terrible things during your time managing M&A (mergers and acquisitions), and as a result of your incompetence, the corporation you worked for now needs to get rid of your acquisitions.

Well, maybe your huge executive severance package will ease the nightmares, but the reality is that the company now has operations it doesn’t want anymore.

Divestiture is a broad term that can include several different potential methods for accomplishing the same thing: getting rid of assets. In the case of M&A, if a division/branch/operation within the company can’t stand alone as a company, then it will likely just shut down those operations and liquidate the hard assets for whatever it can get for them.

If that division/branch/operation has the potential to operate independently of the corporation, then it will likely spin off into its own company. In other words, it will stop being a part of the larger company and just operate independently.

One example of this happening occurred in 2007 when Daimler sold its Chrysler operations to a capital investing firm. This divestiture came following weak sales by Chrysler and an inability by Daimler to do anything successful with it. Chrysler was sold and later repurchased by another automotive manufacturer, Fiat.

Daimler is a perfect example of a merger-gone-wrong that later resulted in a divestiture. Daimler decided it was better to sell the division for what it could and take the loss rather than lose everything trying to fix a company it didn’t have the ability to help. The proverbial “money pit” applies to all levels of investments, not just homes or cars.

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