 Hello and welcome to this session in which we will discuss the concept of divesture. Think of divesture as the opposite of the prior session where we discussed mergers in acquisition. In a divesture, also known as a dye investment, it's a business strategy where a company sells, liquidate, or spin off a subsidiary or a division. In the prior session we looked at mergers. Mergers is when two companies basically merge together and we talked about horizontal merger, vertical merger, circular mergers. Here, or they're called combination as well, here what's happening is somehow they are separating, either you're selling the division, liquidating, or spinning off a subsidiary. Why? Why would companies do that? Well, when the division or the subsidiary is not performing to the company's expectation. Basically, you bought a division in the past or you bought a subsidiary, it's not doing well, or one of your divisions is not doing well, or it's not performing to the core competency of the company, or it's not serving the core purpose of the company. It's not aligned with the strategic goal of the company. Therefore, we're just gonna get rid of it. Or sometime what happens is we're so desperate for money, we just sell a division because we need to pay off that, survive for the next six months or a year to do what? To do better in the future. Or we need to focus sometime on the core business, or sometime we need to comply with regulatory requirement. Basically, we have a quasi-monopoly position and regulators don't like this. Therefore, they force us to sell a position or a division from the company. Now, bear in mind, divesture can have a negative impact on the company. Potential job losses, morale, disruptions to operation and decline in the breadth of the company's operation because you are doing less work, less work in various areas. Therefore, the breadth of the services is declining. Now, bear in mind, this is a strategic decision that companies do not take lightly and typically follow a comprehensive analysis. So, this is a major decision. This is a strategic decision for a company. So, it's done at a top level with a lot of studies. There are several forms of divesture that the company can undertake. One is the sale of assets. Two, sale of the subsidiary. They can do a spin-off or they can do an equity carve-out. Now, once you see a list with Farhat, what's gonna happen next is I'm gonna go over each component of this list, explaining what it is and giving you an example from the real world to relate. Starting with sale of assets. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's gonna help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. Sale of asset. The parent company can sell off assets which can include property, plant or equipment or intangible, specific intangible assets. So, you're selling one thing specifically. Again, this is often done to improve the financial performance or to pay off debt or to invest in the core business because we really don't need this asset anymore, we're better off using the money somewhere else. In 2012, Sony sold its New York headquarter for 1.1 billion. For what purpose? To raise cash. When Sony was doing very well back in the 80s, they bought it. They invested in it. I'm not sure if it's in the 80s or earlier or later, but when they were doing well, they bought this headquarter. Now, they felt, you know what, it's time to sell it. At the time, the company was facing financial losses. Selling the asset was a way to stabilize its financial position. Basically, keep up with inventory, make payroll until things turn around. Sale of a subsidiary. The parent company could also sell a subsidiary to another company. Just like they buy a subsidiary, they can sell it. The reason is often maybe to raise cash or maybe to focus on the core operation or because the subsidiaries was underperforming. An example will be in 2019, Nestle, a multinational food and beverage company announcing the sale of its skincare subsidiary. Notice skincare is a separate business than the food and beverage. They sold it to Abu Dhabi Investments Authority. The sale was approximately for 10.2 billion. Sometime the amount is quite large. Spinoff is another way to divesture. The parent company can create a new independent company by separating a subsidiary or a division and distributing its shares through the existing shareholders. Basically, what happens is you have the company like eBay and what they do is within eBay, they take a division, they take it out and they create a new company of it. This way, the division can operate independently and focus on its own business. In 2015, this is what eBay did when they separated PayPal into a separate business as a publicly traded company. This move was intended to allow each business to better focus on the individual strategies and growth opportunity. Equity carve out is another way of divesture. The parent can sell part of the subsidiary to the outside investors through an IPO. This way, the subsidiary can access capital market directly and the parent company can still keep control if it retains more than 50 percent of the share. The classic example is Google. In 2004, Google initial public offering can be seen as a form of equity carve out. What happened is this in Google. The founders, Larry Page and Sergei Abram, because everybody wanted to be part of Google and the rest of the shareholders, basically the initial shareholders, they sold a portion of their equity to the public. Now, bear in mind, although they sold you the shares, those shares were non-voting shares. So they gave you some equity. It looks like equity, but it's like really an equity carve out because they did not give you the voting power. So it's like you have the shares, but you have no voting power. What does that mean? It means Larry Page and Sergei Abram, they kept Bram, not Bram. Bram, they kept control of the company because your shares, you cannot vote with them. This allowed Google to raise funds to get the money for expansion while keeping control for strategic direction. So you have no saying you don't vote in their decision. Larry Page and Sergei Abram, they can still make all the decisions. That's what they wanted to do. And people are okay with that because having Larry Page making the decision, that's good for you. Once again, to summarize, make sure you know the various types of divestiture and what each one entails. What should you do now? Go to Fahhab Lectures and look at additional MCQs that's going to help you prepare for the exam. Good luck, study hard, and stay safe.