Examples of divestitures include selling intellectual property rights, corporate acquisitions and mergers, and court-ordered divestments. Therefore, you dont have to give them much of a higher return at all to get them to hold more of those dirty stocks. With that high a correlation between green and dirty companies, the whole effect [of ESG investing] just disappears; it just doesnt do anything, he added. Much of the corporate downsizing of the 1990s has been the result of acquisitions and takeovers that were the rage in the 1970s and early 80s. Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. Companies divest assets and operations to adapt to an evolving business environment. Through divestiture, a company can eliminate redundancies, improve operational efficiency, and reduce costs. We continue to believe that this is the case. Key Takeaways Divestment occurs when a company sells off some or all of its assets or subsidiaries. For example, in 2014 the Gates Foundation came under scrutiny from protesters because of its investments in the G.E.O. Elsewhere, I believe, the preferred term was disinvestment, and in some places, though less commonly, divestiture appears to have been used. Dear Shareholders of Borqs Technologies, Inc.: The purpose of this letter is to help clarify the proposed divestment of our company's . If shareholders are well-diversified, the personal capital loss is negligible. Interestingly, this result is true regardless of the weight socially responsible shareholders put on aggregate welfare, as long as this weight is . While most divestment transactions are premeditated, company-initiated efforts, at times this process could be forced upon them as a result of regulatory action. SANTA CLARA, Calif., April 26, 2023 (GLOBE NEWSWIRE) --. Drawing from his earlier point, he noted that lower returns for clean companies will imply a lower cost of capital for them compared to so-called dirty companies, but the main question is how much lower. The first is to feel good that theyre not investing in dirty companies, he said. Perhaps both divestment and shareholder engagement are needed, some activists argue, in order to bring public shaming and pragmatism simultaneously to bear. Above all, divestment campaigns risk distracting from more directly effective activities. Divesting does not necessarily mean shrinking, however. Many companies will use divestment to sell off peripheral assets that enable their management teams to regain sharper focus on the core business. There are three basic types of divestitures: sell-offs, spin-offs and split-ups. Mergers and Acquisitions, 1 However, there are many reasons why companies engage in divestitures, and not all of them have a positive impact on the company. It is commonly used to refer to the downsizing of a business, though more recently the term has been used to describe the strategy of both institutional and individual investors. If socially conscious investors control the remaining 49% that is in favor of the initiative, they would need a little over 1% more to clinch the vote. Investors reward those companies whose strategies they appreciate and that execute effectively; they punish those whose strategies and execution they disapprove of. Some of the most common reasons include: Most companies decide to sell off a part of their core operations, if they are not performing, in order to place more focus on the units that are performing well and are profitable. Selling off an asset requires someone else to buy it, which, in the case of fossil fuels, can mean. Unsurprisingly, retail investors lit up the board, sending RIVN stock up over 54% during the trailing five sessions. Investors who espouse environmental, social and governance (ESG) principles will achieve little by selling their shares in so-called "dirty" companies, according to new research co-authored by Wharton's Jules H. van Binsbergen. Investopedia does not include all offers available in the marketplace. Portfolios that were reshaped out of necessity in the wake of the financial crisis can now be assessed through the lens of opportunity. That is, ESG-unfriendly companies are not penalised sufficiently if investors dump them and switch to clean companies, van Binsbergen continued. In the long run, such stigma might lead to fewer people wanting to work at fossil-fuel companies, driving up the cost of labor for those corporations, and perhaps to greater popular support for better climate policies. Several studies have shown that, because of the pressure against investing in morally dubious companies, unethical investments (sometimes called sin stocks) produce higher financial returns for the investor than their ethical alternatives. Where, then, does this leave us? Some examples include revenue collection, law enforcement, water supply, and prison management. There are many reasons why a corporation may decide they need to sell an asset, a business unit, or the entire company. "It's the political effects that really matter. But we live in a time when most business units can conceivably be assets in play. divestment, also called divestiture, the disposal of assets in any of a variety of ways, usually for ethical, financial, or political reasons. That person clearly doesnt care about the ESG aspect of it, making it less likely that investor pressure could force changes in the company. What happens to share price after divestment? Allowing the divestment of a non-core business in a tax-efficient manner; A spin-off requires advanced planning across a number of disciplines, incorporating elements of capital markets, tax, finance, intellectual property, and mergers and acquisitions. For example, the Campaign to Unload, which encourages divestment from gun manufacturers, describes its aim as to hit back at irresponsible gunmakers where it hurts: their sources of funding, even though gun manufacturers get funding from selling guns, not selling stocks. (See Exhibit 3.). Items that are divested may include a subsidiary, business department, real estate holding, equipment, and other property, or financial assets. There is one way in which divestment campaigns can have a positive impact. Youll make less money by investing in green stocks, and you will make more money by investing in dirty stocks. Is Australia being left behind? Thames Water's woes are a sign that basic oversight of critical industries simply isn't happening, says Nick Butler of King's College London Investopedia requires writers to use primary sources to support their work. In finance, divestment or divestiture is defined as disposing of an asset through sale, exchange, or closure. Divestment can result from either a corporate optimization strategy or else be driven by extraneous circumstances, such as when investments are reduced and firms withdraw from a particular geographic region or industry due to political or social pressure. Disinvestment, also known as divestiture, occurs when an organization liquidates or sells part of its assets or an entire division without the intent of reinvesting in it. They should be clear that they aim to stigmatize the organizations (like fossil-fuel companies) that are being invested in, not those that do the investing (like universities, pension funds, or foundations). Competition authorities often demand divestituresespecially in customer-focused industries, such as high technology, media, telecommunications, and retailas a prerequisite for approval of large mergers. Items that are divested may include a subsidiary, business department, real estate holding, equipment, and other property, or financial assets. What are the benefits of divestment? (SeeLooking Anew at the Value of Divesting, BCG article, August 2012.). As the global economy regains its equilibrium, companies can move from fighting off the nearest crocodile to the boat and plan for the longer term. But that Vanguard fund manages only $12 billion in assets, which is a small fraction of the U.S. stock market capitalization of about $50 trillion, van Binsbergen noted. Improving Operating Performance. Creating Shareholder Value with Divestitures, Plant and Prune: How M&A Can Grow Portfolio Value. ", Bristol-Myers Squibb. A split-off is a corporate reorganization method in which a parent company divests a business unit with the option for exchanging shares. Specific reasons change over time with shifts in the economy, individual industry dynamics, regulatory policy, and other factors, but three of the most consistent are the following: Focusing on the Core Business. Van Binsbergen pointed to other reasons why divestment doesnt always help the ESG cause, and in some cases, it could worsen the situation. A carve-out is when a parent company sells shares in the new . "Section 355.Distribution of Stock and Securities of a Controlled Corporation," Page 4. Every circumstance is different, of course, but our research shows that investors perceive newly streamlined and more focused organizations to be of higher value. Yet for others, the knowledge that vocal shareholders may eventually divest could also disincentivise them from acting on shareholder concerns, believing they can wait these shareholders out. ", Shire Pharmaceutical. The Marks & Spencer chairman's digital push is good for access - but shareholders should be encouraged to turn up. What do you call a person with authority? Or a company may divest a business so it can reinvest the proceeds in the remaining company or pursue growth opportunities, including acquisitions. You can also read our. Rather than increasing operating cash resources, companies can opt to enhance shareholder value by selling an asset and returning the proceeds directly to shareholders through a share buyback program, a one-time special dividend, or a regular dividend increase. Sixteen of the 50 biggest divestitures in 2013 were made by energy and financial services companies. Sudarsanam City University Business School, Barbican, London EC2Y 8BH, UK Received May 1991 This paper examines the stockmarket reaction to corporate divestments by a large sample of U.K. companies and investigates some . No matter their starting point, BCG can help. They reward divesting companies by expanding their EBITDA multiple by an average of 0.4 timeswhich, as we have seen, comes on top of an already improved operating margin. The stock price of the average seller in our sample increased by 1.4 percent in the days following the divestiture announcement. Also known as divestiture, divestment is. Most corporations are geared up to buy assets, not sell themthe majority acquire three businesses for every one they divest. ", Baxter. We find in the data that the correlation between green and dirty is so high that some investors are willing to hold more dirty stocks for almost no inducement, van Binsbergen said. Youre giving the person that cares the least about ESG the opportunity to buy the whole stream of profits almost for free.. That person clearly doesnt care about the ESG aspect of it, making it less likely that investor pressure could force changes in the company. According to van Binsbergen, socially conscious investors who divest from ESG-unfriendly companies often state they have two objectives. More recently, a coalition of two thousand individualsincluding celebrities like Leonardo DiCaprioand four hundred institutions worth $2.6 trillion has pledged to divest from fossil-fuel companies. For example, for $1.00 of a parent company share, the shareholder may receive $1.10 of a subsidiary share. Since the subsidiary now has a certain market value, it can be used to determine the split-off exchange ratio. Its impact, however, is murkier. Tax-free spinoff refers to a corporate action in which a publicly traded company spins off one of its business units as an entirely new company. The list of top divesting companies since 1990 includes three banks (Deutsche Bank, JPMorgan Chase, and Citigroup) that needed to navigate the financial crisis and reorient themselves for a postcrisis environment, and two consumer-goods companies, Philips and Unilever, for which continual portfolio reshaping is not unusual. Instead of investing their money in a subsidiary or unit that is performing poorly, businesses will sell the assets and save money to prevent insolvency. We find in the data that the correlation between green and dirty is so high that some investors are willing to hold more dirty stocks for almost no inducement, van Binsbergen said. In 2013, divestitures represented 48 percent of all transactions, compared with 45 percent in 2011 and only 40 percent from 1990 through 1999. Companies in energy, industrials and materials, financial services and real estate, media and telecommunications, and consumer and retail have been particularly active divestors since 2011, especially when compared with industries such as health care and high tech, where business dynamics cause mergers and acquisitions to dominate activity. Thats more like a placebo effect. The spin-off is a distinct entity from the parent company and has its own management. Moreover, divestment campaigns may stigmatize organizations that are doing valuable work. Although contemporary divestment campaigns have the potential to do a lot of good, we need to be clear about what their path to impact might be. The timing for shedding one line of business in favor of another, or for generating cash to pay down debt or invest in core operations, is propitious. Another drawback is that both the parent company and the spun-off subsidiary may be more vulnerable as takeover targets for friendly and hostile bidders because of their smaller size and pure-play status. Moreover, in response to the question How does a divestment campaign work?, the group claims: When many investors decide its time to sell at the same time, that companys stock comes under pressure. Baxalta's management rebuffed the offer, saying it undervalued the company. Please do not edit the piece, ensure that you attribute the author, their institute, and mention that the article was originally published on Business Think. To create long-term value, corporate boards must focus on managing talent, strategy, and risk. Shareholder activism takes a different approach to divestment. Students are lobbying their universities to divest from morally dubious industries, such as tobacco or firearms. Copyrights 2023 All Rights Reserved by Assets assistant Inc. What are Disinvestment and Privatisation? Moreover, it also aims at providing financial aid. That is, ESG-unfriendly companies are not penalized sufficiently if investors dump them and switch to clean companies, van Binsbergen continued. One was the equity risk premium, which is a measure of how much stocks outperform bonds. If you as a socially conscious investor make sure that you are on the margin, then with little investment you can swing the vote, and potentially make a large impact, he said. (See Exhibit 1.) Over the past year, a few activist and institutional investors have adopted Berk and van Binsbergens approach of engagement with companies they perceive as ESG-unfriendly. (See Exhibit 2. While divesting companies reduce complexity and improve capital allocation, they also accumulate war chests for investing in existing operations and funding acquisitions. By copying the HTML below, you will be adhering to all our guidelines. The factors driving divestitures vary by industry. Shareholder activism is focused, persistent and growing, as our summary of shareholder activism trends shows. An example: suppose that the market price for a share in ExxonMobil is ten dollars, and that, as a result of a divestment campaign, a university decides to divest from ExxonMobil, and it sells the shares for nine dollars each. Disinvestment aims at lessening the fiscal burden on the government, because of the inefficiency of the Public Sector Undertaking. Using the most optimistic estimates, we show that to effect a more than 1% change in the cost of capital, impact investors would need to make up more than 80% of all investable wealth, the paper stated. Energy companies have shed assets as they adjust to a post-Fukushima world, react to regulatory shifts (especially in Europe), and position themselves to pursue new opportunities in shale gas and renewable energies. According to van Binsbergen, socially conscious investors who divest from ESG-unfriendly companies often state two objectives. In that case, investors end up poorer when they sell dirty stocks and buy clean stocks. Second, he added that ESG investors want their divestment to "change the way companies do business" and become more ESG-friendly. Ad Choices, How Californias Fair Pay Act Will Help Women, The Good (and Bad) News About Poverty and Global Trade, What Justice John Paul Stevenss Papers Reveal About Affirmative Action. Proceeds from these sales are typically used to pay down debt, make capital expenditures, fund working capital, or pay a special dividend to a company's shareholders. There is an important difference, therefore, between divestment and product boycotts. If that makes them feel good, it may have some utility. Second, he added that ESG investors want their divestment to change the way companies do business and become more ESG-friendly. The second looked at the shares of clean and dirty companies in the composition of the US economy. Source of funds In times of financial difficulty and to keep the business afloat, businesses sell off their non-core assets. The rewards that capital markets give divesting companies are clearly visible in their increased valuation multiples. The question in that case is, have you done something good?, If you want to convince companies to do the right thing, then go to the shareholder meeting and vote through the proposals that are the right thing to do. Jules H. van Binsbergen, In an extreme scenario van Binsbergen visualized, divestment could drive down the price of a dirty stock to a level where other investors who dont care about ESG principles could end up gaining full control. 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More than half of all divestitures create value: our research shows that 55 percent resulted in an average CAR increase of 6.6 percent for the parent company. Examples of divestitures include selling intellectual property rights, corporate acquisitions and mergers, and court-ordered divestments. Read more: The 'S' in ESG and what it truly means for corporate sustainability, The reason divestiture has so little impact is that stocks are highly substitutable, and socially costly stocks make up less than half of the economy, the paper explained. What are the reasons behind a divestiture? A recent example was the divestment of Delivery Hero's German food delivery service to its Dutch competitor Takeaway for 0.9bn in 2018. Investors anticipate these increases by bidding up divesting companies share prices immediately following an announcement. Some shareholder campaigns force bold changes that deliver positive near-term results, but most companies lose 4% to 25% of TSR within a year of an activist attack. Instead, investors could have more success if they buy those so-called dirty stocks and then engage with those companies managements to adopt ESG-friendly policies, the paper contended. Youre giving the person that cares the least about ESG the opportunity to buy the whole stream of profits almost for free.. Divestment is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. Why Are Some Spin-Offs Taxable and Some Are Tax-Free? Why did she delete those linesand why did Justice Clarence Thomas adopt them in his own opinion? Divestitures not only bring internal improvements for companies; they also reward investors. A spin-off, split-off, andcarve-outare different methods a company can use to divest certain assets, a division, or a subsidiary. Our analysis of 6,642 divesting companies since 1990 shows that EBITDA margins increase by more than 1 percentage point between the announcement of a divestiture and the end of the companys fiscal year. In order to determine that change in the cost of capital, Berk and van Binsbergen studied the FTSE 4Good USA Index, which has 491 companies including Microsoft, Apple and Amazon and is part of a broader FTSE 4Good index that measures the performance of companies with strong ESG practices around the world. All rights reserved. Over time, a low stock price can make it harder for a company to get loans, finance its sales, or expand the business. The truly strategic question any company or CEO needs to ask is whether one companys assets could have a higher value for another company. ), Butand this is an important butto reap the full benefits, companies need to choose and execute the right divestiture path on the basis of their individual situation, the attributes of the assets being shed, and the market environment at the time of the transaction. Its sale lifts overall profitability. On the flip side, privatization is encouraged to make the best possible use of the countrys resources as well as to increase the operational and dynamic efficiency of the concern. In a carve-out, the parent company sells some or all of the shares in its subsidiary to the public through an initial public offering (IPO). Van Binsbergen explained how that works with an example of a companys shareholder meeting where 51 per cent of the votes are against a green initiative. If you want to keep a step ahead, the best way is through "activist-ready" governance, risk and compliance strategies that pre-empt the shortcomings shareholder activists pounce on. While the choice of a specific method by the parent company depends on a number of factors as explained below, the ultimate objective is to increase shareholder value. These include white papers, government data, original reporting, and interviews with industry experts. Use of this site constitutes acceptance of our User Agreement and Privacy Policy and Cookie Statement and Your California Privacy Rights. For the month, shares find themselves up over 81% while on a year-to-date basis . For each $1.00 of Bristol-Myers Squibb's common stock accepted in the exchange offer, the tendering shareholder would receive $1.11 of Mead Johnson stock, subject to an upper limit on the exchange ratio of 0.6027 Mead Johnson shares per share of Bristol-Myers Squibb. When more than 51% of the stake is sold by the government of a public sector undertaking, to the private individuals or firm, the process is termed as privatization. But the generally positive reaction from Wall Street to announcements of spin-offs and carve-outs shows that the benefits typically outweigh the drawbacks. If you want to convince companies to do the right thing, then go to the shareholder meeting and vote through the proposals that are the right thing to do. Businesses and governments resort to divestment generally as a way to pare losses from a non-performing asset, exit a particular industry, or raise money. All qualified applicants will receive consideration for employment without regard to race, color, age, religion, sex, sexual orientation, gender identity / expression, national origin, protected veteran status, or any other characteristic protected under federal, state or local law, where applicable, and those with criminal histories will be considered in a manner consistent with applicable state and local laws.Pursuant to Transparency in Coverage final rules (85 FR 72158) set forth in the United States by The Departments of the Treasury, Labor, and Health and Human Services click here to access required Machine Readable Files or here to access the Federal No Surprises Bill Act Disclosure. So. A split-off offers shares in the new subsidiary to shareholders but they have to choose between the subsidiary and the parent company. Many companies get an added boost because the business being sold or spun off was a corporate orphan, receiving inadequate investment and attention, and consequently producing poor performance. Disinvestments can take the form of divestment or a reduction of capital expenditures (CapEx). Bristol-Myers owned 170 million Mead Johnson shares and accepted just over 269 million of its shares in exchange, so the exchange ratio was 0.6313 (i.e., one share of Bristol-Myers Squibb was exchanged for0.6313 shares of Mead Johnson). Regardless, a company's rationale for a divestiture should be strategic, clear and compelling, and one the board fully understands and endorses.
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