Demergers

Reasons for Demergers

A __demerger __is the opposite of a merger or takeover. It involves a company either selling off part of its business, or the company as a whole being separated into two or more separate, independently owned companies.

There is a number of reasons why businesses decide to demerge:

1. To concentrate on the company’s ‘core’ business – The business world is influenced by the advice from management consultants and business ‘gurus’, who write influential books on how to run companies more successfully. Different approaches to business strategy therefore tend to become more, and then less fashionable over time. The ‘core business strategy’ is based on the view that companies will be more successful in the long run by concentrating on what they do best, where they have a proven track record and expertise. By selling off parts of the business that are not part of the core, managers will be able to focus better on what they do best.
2. Market value of the business might be higher if it is split up – If investors believe that some parts of the business are under-performing and affecting profits, the overall market value of the business might be higher if the business is split into separate companies.
3. Lack of synergy – Mergers sometimes happen because it is thought that each company can benefit from the other. For instance, there are examples of aircraft manufacturers merging with car makers. Perhaps the aircraft business brings technological excellence to the merger, whilst the car maker has a better track record of controlling costs. The result could be cars that perform better and planes that are cheaper to make. In practise, it is often found that these synergies (the mutual benefits of a merger) fail to materialise, and were based on unfounded optimism.

How Demergers Affect

Businesses

A successful demerger could mean increased efficiency, lower costs and more competitive products, leading to higher sales and profits. A badly judged demerger might have the opposite effects.

Consumers

They might benefit from lower prices and better products if there are improvements in efficiency and more focus on core activities. But if there were synergies, these could be lost, resulting in poorer products and possibly higher prices.

Employees

Some employees may have opportunities to be promoted because there will be a separate management structure in each of the demerged companies. But others may lose their jobs if the demerger leads to efficiency gains so that fewer workers are needed.