3.1.3 De-mergers

Question 1

What are the 3 reasons for a de-merger?

Answer 1

• lack of synergies
• value of the company/share price
• focussed companies

Question 2

How does a lack of synergies lead to de-mergers?

Answer 2

This is when different parts of the company have no real impact on the other and fail to make each other more efficient. Lack of synergies means managers are splitting their time between different parts of the company leading to diseconomies of the scale, meaning they will want to split

Question 3

How does the value of the company/share price lead to de-mergers?

Answer 3

Some companies de-merge because the value of the seperate parts of their firm is worth more than the company combined. This could be because some parts of the business are operating well but are being brought down by the lack of success from anther part of the firm

Question 4

How do focussed companies lead to de-mergers?

Answer 4

Some believe if managers and CEOs are more focussed on individual markets they will become more profitable and more efficient. Managers have limited time and skill which makes it difficult to manage all areas of a diverse business

Question 5

What are the impacts of a de-merge on workers?

Answer 5

If companies split to become more efficient this may result in job losses, equally could lead to a promotion1§

Question 6

What are the impacts of a de-merger of businesses?

Answer 6

Concentrating on a smaller core of the business may lead to increased efficiency, leading to better products and cheaper prices.
However, de-merged firms may be less efficient through loss of economies of scale meaning higher prices and worse goods.