Portfolio restructuring essentially involves modifying the business portfolio through divestitures and demergers.
A divestiture involves the sale of a division or plant or unit of one form to another. From the seller’s perspective, it is a form of contraction from the buyer’s point of view, it represents expansion. For example, when Coromandal Fertilizers Limited sold its cement division to India Cements Limited the size of Coromandal Fertilizers Limited contracted whereas the size of India Cements limited expanded Hence, a divestiture is the obverse of a purchase.
Motives of Divestiture:
Divestiture decisions are prompted by a variety of motives. The more important ones are discussed below:
A common motive for divestiture is to raise capital. Cash strapped firms seem to resort to divestiture to shore up their liquidity. CEAT for example sold its nylon tire cord plant at Gwalior to SRF for Rs 3250 million so that it could settle its payments and raise funds to concentrate on tire manufacturing.
Curtailing of Losses:
A prominent reason for divestiture is to cut losses. More bodily it may imply that the unit that is proposed to be divested its earnings to get a sub-normal rate of return.
Strategic Realignment: the seller may divest a unit which no longer fits with its strategic plan. Often such a unit tends to be in an unrelated line and may demand a lot of managerial time and attention. After divestment the seller can concentrate on its core business. ICI appears or be a good example. It sold its Fiber division to Terene India and fertilizers division to Chand Chap Fertilizers and chemicals and seeds division to Hysum India. These divestitures, ICI believes will enable it to focus on paints and industrial chemicals, in line with its parent’s global strategy.
Efficiency Gain: A divestiture results in an efficiency gain when the unit divested is worth more as part of some other firms or as a stand alone business. This happens when there is a reverse synergy sometimes referred to as ‘anergy’. This means that the value of the parts is greater than the whole. In simple arithmetic, it implies that 5—3 = 3. Remember that a merger is motivated by the possibility of synergistic benefit, where the whole is expected to be more valuable than the sum of the parts 2+3 = 6.
A demerger results in the transfer by a company of one or more of its undertakings to another company. The company whose undertaking is transferred is called the demerged company and the company (or the companies) to which the undertaking is transferred is referred to as the resulting company.
A demerger may take the form of a spin off or a spilt up. In a spin off an undertaking or division of a company is spun off into an independent company. After the spin off, the parent company and the spun off company are separate corporate entities. For example, the Information Technology Division of WIPRO Limited was spun off as a separate company in the late 1980s. In a split up a company is split up into two or more independent companies. For example, the Ahmedabad advance Mills was split up into two separate companies, viz, the New Ahmedabad Advance Mills and the Tata Metal Strips. Though spin offs and split-ups are different in form, their economic substance is the same.