Divestiture refers to a corporate process under which the company sells, liquidate or spin of a division or a subsidiary of a company. Divestiture itself is of two types, i.e. Full and Partial Divestiture and is a result of a management decision to no longer operate a business unit or a part of business unit once it is not a part of a core competency.
Recommendation:
As for DuPont, it is highly recommended that the company should fully enter into full divestiture of its business unit or a subsidiary. Not only this will help the company to focus on its areas of high profitability and core competency but entering into full divestiture will help the company to divest assets of a business line or subsidiary which do not fit well into their business strategies now. However, full divestiture carries equal pros and cons associated with it and the same are discussed below:
Advantages of Full Divestiture:
i) Strategic Focus:
As already discussed, full divestiture fully reveals a company from the business unit or a subsidiary that are no longer in line with the company’s core competencies and in this way, the parent company can maintain their strategic focus. Furthermore, through full divestiture, the company frees up internal assets which were being used in non-profitable business units or subsidiaries, which after the full divestiture decision, can be used to strengthen the other business.
ii) Additional Cash:
If the company sells its business unit or subsidiary, it can also enhance its cash holdings which be used to purchase or to improve the asset lines of other business units that can enhance the overall profitability of the company.
iii) Transparency and enhanced value:
Full divestitures also bring transparency and enhanced value in companies with large and diversified businesses and activities. In other words, through full divestiture, the companies can now have streamline focus and with greater transparency and freed resources, the overall value of the company will be higher
However, it is important to note that full divestitures also have some risks and disadvantages associated with it:
Risks and Disadvantages of Full Divestiture
i) Additional Costs:
One of the primary disadvantages of full divestiture is that the parent company will not be able to absorb the portion of fixed costs which it was ding earlier and hence, it now has to bare the addition cost. In other words, every company has some fixed costs as rent, maintenance etc., and allocation of such costs over two or three business units means lower average cost to the parent company. However, with full divestiture of existing business unit or subsidiary, the parent company will now be required to bare additional portion of fixed costs and this might put pressure on the profit margins of the company.
ii) Existing Contractual Obligations:
Another issue with the full divestiture is that various partnership agreements, support agreements and vendor contracts may contain mentions of the divested business and were signed primarily to support the divested business or subsidiary only. Thus, if the company decides to fully divestiture the business or subsidiary unit, then, the parent company might have to end these agreements and shall not be able to attain any benefit from them.
Works Cited
Investopedia. (n.d.). Divestiture. Retrieved June 8, 2014, from http://www.investopedia.com/terms/d/divestiture.asp
Wright, T. (n.d.). What Are the Advantages & Disadvantages of Divestiture? Retrieved June 8, 2014, from http://yourbusiness.azcentral.com/advantages-disadvantages-divestiture-26064.html
