3.1.3 - Demerger Flashcards
Define Demerger
When a firm splits itself into separate parts to be two or more firms
Reasons for Demergers for firms
. Demergers can increase the share prices of a company. This is because if loss making areas are sold off, the business will prosper with greater efficiency, specialisation and more investors are likely to buy shares in the company. Higher share prices benefits existing share shareholders and also increase the value of a company making it easier to raise funds in the future
. Demergers can increase profits — This is because smaller separate firms benefit from specialisation and have a narrower focus on business operations. As a consequence, productive efficiency and productivity will increase, lowering cost of production and increasing profit margins
. Demergers can combat diseconomies of scale — If a business grows too much, it may suffer from poor communication. Also worker motivation and thus productivity will also suffer if a business grows. Therefore, demerging will reduce diseconomies of scale and lower average costs, increasing profits and allowing the business to become more competitive
. Demerging could be a response to government regulation where a large firms may have excessive monopoly power.
Impact of Demergers on consumers and workers
. Consumers may benefit or lose out. If demerged firms cut costs and lower prices they will benefit. Consumers will lose out if demerged firms become more focused on increasing prices in their business by increasing prices
. Some workers may lose jobs following a demerger. If a firm becomes more efficient due to demerger then jobs losses may occur
. Business will benefit due to demerger as it leads
to specialisation and greater efficiency. If firms cut costs and develop new innovative products, then profits will rise. If there is inefficiency after the demerger then the profits will fall
Benefits of De - merger
1.) Demerger can result in allocative efficiency, which benefits consumers. This is because if the market is more competitive due to more firms, there will be an incentive to increase efficiency and specialise
As a consequence, cost of production will be lower resulting in lower prices and higher consumer surplus. There will also be more demand for goods and services with lower prices.
2.) Workers benefits from greater morale after a demerger. Due to more focus by management on worker training and performance, workers feel value and increase their labour productivity, reducing costs of production for firms.
3.) Demerger can result in dynamic efficiency if higher profits are made as businesses specialise and separate.This is where higher profits are reinvested in to company through form of R&D and innovation, new capital machinery, etc. Reinvestment improves living standards and affordability for consumers, whilst increasing profit margins and reducing costs of production for firms over time.
Costs of De - merger
1.) It may result in job losses for workers if a firm demerges since there will be changes to management. Firms will then have to pay redundancy costs, which increases the cost of production, shifting supply to the left from S1 to S2. Furthermore, it affects the standard of living and quality of life of workers as they lose incomes.
2.) However, if demand for a good or service is inelastic, firms may choose to not reduce price even if cost of production falls as revenue increases. This means that consumer surplus falls. Demand also falls but proportionately less than the rise in price.
3.) A demerger decreases market share in an industry, which means that less control of prices. This means less revenue if a firm if forced to decrease its prices
4.) Demergers means less reinvestment for growth as there will be less retained profits if a firms split and decreases in size
A lack of business growth means that economies of scale can’t be exploited
