3.1.3 De-Mergers

Question 1

What is a demerger?

Answer 1

A demerger occurs when a firm decides to split into separate firms

Question 2

What are the key motivations for a demerger?

Answer 2

1. Focusing on core businesses to cut costs and therefore improve profit margins & returns to shareholders
2. Reduce the risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, and achieve lower management costs
3. Raise money from asset sales and return it to shareholders
4. A defensive tactic to avoid the attention of competition authorities who might be investigating market power

Question 3

What are recent examples of demergers?

Answer 3

• US food giant Sara Lee sold off coffee business Douwe Egberts
• Pfizer selling their infant nutrition business to Nestle
• PayPal splitting from eBay in 2014

Question 4

What are the impact of demergers on businesses?

Answer 4

Long term - higher returns
Short term cost of selling off a part of their business

Question 5

What are the impact of demergers on employees?

Answer 5

Expected job losses if demerger is driven by a desire to control costs - although new jobs might be created e.g. arising from a successful management buy-out of a demerged business
Opportunities for managers of newly demerged business

Question 6

What are the impact of demergers on consumers?

Answer 6

Impact on prices depends on scale of competition
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