Divestitures play a crucial role in helping companies streamline their operations and raise capital. Understanding the different types of divestitures is essential for leaders making strategic decisions. There are many different types of deals, but 3 main types of divestitures: Full Sale, Carveout, and Spinoff.
Full Sale
Sometimes called a “sell-off,” this is the simplest type of divestiture where the selling company completely sells a business unit or assets. The buyer can be a strategic buyer or private equity firm. This is typically a complete sale where ownership is fully transferred. The selling company no longer retains any ownership or control over the sold unit or assets.
Example: Microsoft purchasing 100% of Activision Blizzard for around $68.7 billion. This means Activision will fully merge into Microsoft’s operations, with no separate ownership or independent structure remaining.
Benefits:
- Influx of capital.
- Simplifies the company’s structure by removing non-core assets.
- Allows the selling company to focus on its core business areas.
Carveout
A carveout involves the selling company separating a business unit or assets, establishing a new identity, and then seeking investors for the new entity. The original company maintains some ownership while raising capital. Investors typically come from the public via IPO, but can also come from private interests like a private equity buyer.
Example: GE carved out a 51% stake in NBCUniversal, selling it to Comcast for approximately $16.7 billion while retaining a 49% ownership. This allowed Comcast to take operational control while GE still benefited from NBCUniversal’s performance.
Benefits:
- Raises capital.
- Retains some control and potential future upside from the growth of the carved-out entity.
Spinoff
A spinoff is similar to a carveout in that a parent company separates a business unit (or assets) and establishes a new identity. However, the original company does not retain any ownership, and the companies are managed completely separately. Ownership of the new company is distributed among existing owners of the original company. If certain conditions are met, this can be a tax-free transformation. There is no buyer or investor in a spinoff situation.
Example: In 2015, Hewlett-Packard (HP) executed a spinoff, creating two independent companies: HP Inc and Hewlett Packard Enterprise (HPE). HP shareholders received shares in both HP Inc. and the newly formed HPE, giving them ownership stakes in each company. HP as a company did not retain any ownership in HPE.
Benefits:
- Unlocks value by creating a focused, independent entity.
- Provides shareholders with direct ownership to the new entity.
- Allows the new entity to pursue its own strategic goals and growth opportunities.