3.1.3

Question 1

Demerger

Answer 1

When a large firm is separated into multiple smaller firms

Question 2

Reasons for demergers

Answer 2

• lack of synergies
• growth: faster growing part of a firm might be separated
• diseconomies of scale : if the firm is so large that average costs rise with more output, the firm might choose to split
• focussed companies: firms might be able to grow faster if it focussed on a few markets, rather than several
• resources: if a firm can no longer afford to invest the business, due to a lack of resources, they might sell off a part
• finance: selling off part of the firm can raise valuable finance, which could be better invested in a more profitable part of the firm

Question 3

Synergy

Answer 3

A synergy is when creating a whole company is worth more than each company on its own

Question 4

Impact of demergers for businesses

Answer 4

• firms can dispose of underperforming or loss making parts of the firm
  Allows the new demergers firm to adapt to their unique markets whereas in a large firm, managers could find it hard to focus on each market
• firms might elongate diseconomies of scale
• firm could make profit by selling off part of the firm, invest in other parts

Question 5

Impact of demergers on workers

Answer 5

They might become confused
Roles might be shifted between the demergers firm and the parent firm
Might also be job cuts

Question 6

Impact of demergers on consumers

Answer 6

Removal of diseconomies of scale could lead to lower prices for consumers
Increase choice for consumers
Net welfare gain if the demerger resujts in a higher level of efficiency