3.1 - Demegers

Question 1

When does a demeger occur?

Answer 1

When a firm sells off at least one of the businesses it owns, or splits itself to create two or more separate entities either to operate on their own, be sold or be dissolved

Question 2

What are some reasons for demegers?

Answer 2

• Reducing diseconomies of scale
• Increased business focus
• Cultural differences
• Remove loss making divisions
• Increase liquidity of dividend payments
• Comply with demands of the competition comission

Question 3

Explain reducing diseconomies of scale as a reason for demegers…

Answer 3

• Decreasing the size of the firm reduces output so can reduce the diseconomies and lower the cost/unit which increases the profitability

Question 4

Explain increased business focus as a reason for demegers…

Answer 4

• 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

Question 5

Explain cultural differences as a reason for demegers…

Answer 5

The most common reason for failures of mergers is cultural differences (conflicts arise between workers as a result of different working norms or value systems) Sometimes these differences are irreconcilable and not worth the expense to change

Question 6

Explain removing loss making divisions as a reason for demegers…

Answer 6

It can be more profitable to remove loss-making divisions and replace them with outsourcing

Question 7

What is outsourcing?

Answer 7

Hiring someone outside of the firm to provide goods/services

Question 8

Explain increasing liquidity and dividend payments as a reason for demegers…

Answer 8

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

Question 9

What are dividend payments?

Answer 9

A sum of money paid each year by a company to its shareholders from its profits

Question 10

Explain complying with the demands of the competition commission as a reason for demegers…

Answer 10

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

Question 11

What are the impacts of demegers on the firm?

Answer 11

• 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

Question 12

What are the impacts of demergers on employees?

Answer 12

• 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

Question 13

What are impacts of demegers on consumers?

Answer 13

• 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