Demergers (3)

What is a demerger ?

• A demerger occurs when a firm sells off at least one of the businesses it owns, or splits itself into separate parts to create two or more firms

Reasons for demergers

• Reducing diseconomies of scale - Decreasing the size of the firm can reduce the diseconomies and lower the cost/unit which increases the profitability

• Increased business focus - If efforts and resources are scattered across a large number of firms/ industries it can be hard to maintain focus and profitability. Narrowing the focus can improve profitability

• Cultural differences - The most common reason for failures of mergers is cultural differences. Sometimes these differences are irreconcilable and not worth the expense to change

• Remove loss making decisions - It can be more profitable toremove loss-making divisions and replace them with outsourcing

• Increase liquidity and dividend payments - Demergers generate extra revenue for the firm in the year they occur. This may increase the profit and dividend payments

• Comply with the demands of the competition commission - Sometimes firms are forced to demerge by the competition regulator due to concerns about the high level of market share they may have, which is considered to be anti-competitive and bad for consumers

Impacts of Demergers on Stakeholders

• The impacts on the firm conducting the demerger should be mostly positive and include

  • Opportunity for a more narrow focus on the core business

  • Removing loss-making portions of the business

  • Increased efficiency and lower costs/unit

  • Increasing the annual profits for the year that the demerger occurred

  • Removing some difficult cultural differences

• The impacts on employees include

  • Some workers may lose their jobs

  • Reduced friction from cultural differences can help build better team dynamics

  • A smaller workforce provides more opportunity for promotion

  • Less complications in daily tasks due to more narrow focus

• The impacts on consumers include

  • If successful, better quality products and customer service

  • If successful, lower prices due to the firms new efficiencies

  • If unsuccessful, a narrower product range and perhaps worse quality/customer service

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