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Divesting (Examples) | Advantages | How does Divestiture Process Work? - YouTube
Channel: WallStreetMojo
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today we have a topic with us is what is
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divesting or divestiture well one of the
very famous term that is used in the
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financial industry now many times this
sort of transactions also happens so we
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will try and discuss what is divesting
see turistic means the action of the
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organization of government which
involves selling or you can say
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liquidating an asset or subsidiary it is
also known as your divestiture or this
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investment see divesting is exactly the
opposite of acquisition whereby instead
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of investing acquiring a business tries
to exit from the existing investment or
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asset by selling the same and become the
old government organization they are
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planning to divest its asset subsidiary
maybe by doing so as a part of the
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strategy started to move the company it
can also be done by you know a
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streamlining the business units so that
you know the business can focus on its
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main line of business or it can be done
in case where the proceeds from the
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divesting process are invested elsewhere
to earn a higher return on investment so
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this is basically the process of you can
say selling of the selling in asset and
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usually the asset divested are closely
non-core in nature that is those which
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are not directly using the main line of
the business and the non-core assets can
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take the form of any kind of
asset can be real estate commodities
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Natural Resources currencies or
securities or maybe factory land
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property and so on and so forth
it may also take the form of the entire
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subsidiary or holding in another company
so the disinvestment usually done by the
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way of reduction of asset or business
through sale liquidation or any other
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means of attaining certain financial
goals are started evil so it acts as a
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great source of injecting the cash in
the business without affecting the
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regular business activities and is a
very important strategy in the corporate
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restructuring and a popular tool used by
the business to retire your debt and to
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reduce the leverage
well let's understand the examples of
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this let's understand the same with the
help of the day what's your example
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let's say let's take off X's Bank
Limited is a commercial value providing
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branch banking investment banking and
payment services so the bank is having a
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large investment in land parcels an
investment in various companies listed
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on the local forces so the bank decided
to shore up its what we call as the
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capital base to increase its a lending
capacity
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and decided to diverse its investment
into listed companies and in non-core
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assets like no land passes so by doing
so the Axis Bank succeeded in raising
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capital and those we can see that you
know the devastation limited a vesture
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of the investment is in non-core assets
to improve its capital base by injecting
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cash in the business and focus more on
its main line of business and thereby
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deploying its assets to more profitable
Avenue now what exactly is the purpose
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see there are multiple motives that
makes divestiture of viable option for
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the management to pursue some of them
are as follow like you know it enables
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the business to focus on its core
operations or the line of the business
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where it holds the expertise it is an
effective tool for monetizing the assets
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as divest you're usually results in cash
flow in flow for the business divesting
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is an effective tool through which the
companies can evaluate performance of
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their various divisions and diverse
those divisions whose internal rate of
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return is below the average required
rate of return of the business as whole
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so let's understand the same through an
example of Swiss core or Swiss cob it
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operates in three business divisions
namely in clothing they are into
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automobile and real estate so the
company has an internal rate of return
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closely around 13% 8 and 15 from
its 3 division now Swiss Corp has
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required rate of return closely around
let's see if over here what comes the
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average it is 12 posit yeah it's 12
percent see the average this is just the
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weighted average cost of capital you can
save vac in such a case by divestiture
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of its automobile division which is
generating an internal rate of return 8%
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the company will be able to utilize the
proceeds towards the more profitable
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division which will result in higher
rate of return for the business as a
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whole so this is some time done to
improve the shareholders
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you or due to the informants and
enforcement of the federal authorities
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so non-alignment of the non-core assets
with the main line of business we
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sustained under performance of the
business in its which is which is
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denting overall profitability of the
business assume and of ability of the
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you can say better opportunities
compared with the existing business
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lines also it motivates the management
to divest the existing lines of the
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business and setting of the new business
line now full what are the advantage say
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it helps the business to generate cash
from its non-core investments which
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could be better utilized for expansion
of the existing business starting a new
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business line or retiring the existing
debt it tells the business to also
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allocate its resources main line of
business and generate higher returns for
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its shareholders by improving the return
on equity
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No how does the disinvestment process
works the divesting is the systematic
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process it involves commitment of the
part of the management it makes very
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value creative firstly what they do is
you know they do the review of the
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portfolio we usually it involves review
of the entire business portfolio which
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comprises of analyzing the performance
of the each business unit and relevance
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with the long-term business objective
second you know identification of
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suitable buyer so once a certain
business unit is identified as a part of
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the divestiture exercise a suitable
buyer is identified by taking the
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service of an investment banking firm
which assists in identifying the buyer
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and devaluation of the business unit
which is proposed to be the part of the
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divesting it is important to note that
you know the evaluation exercises
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undertaken taking into consideration
that they derived must be least equal to
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the opportunity cost of not selling the
business in it losses the disintegration
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once the same is finalized the
organization must prepare that this
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integration plan and convey the merits
of such divestiture clearly highlighting
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the purpose behind the divesting alone
with the information regarding the
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benefits that will accrue to the
organization to both internal and the
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external stakeholders to ensure the you
know positive signal is communicated so
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lastly on the conclusion node this is
unarguably an important strategy tool
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used by the business but knowing when to
divest is extremely difficult to decide
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and can turn out to be an expensive you
know mistake if not done correctly so in
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today's business scenario companies are
usually stalled of capital and divesting
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as seen as a sure shot liquidity booster
as it improves if shareholders are
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returned by injecting cash into the
business which can either be used for
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barring the debts from the books of the
business which ultimately improves the
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profitability of the business in
question for expansion of the existing
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business so management must ensure
divesting decisions
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which turns out to be the long-term
value decorative of the business so
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that's it for this particular topic if
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