3.1.3: Demerger

Question 1

What is a demerger?

Answer 1

• A business strategy in which a single business is broken into two more components, either to operate on their own, to be sold or to be dissolved

Question 2

What are reasons for demerger?

Answer 2

• Lack of Synergies
• Value of the Company/ Share Price
• Focused Companies

Question 3

How do lack of synergies?

Answer 3

• When the different parts of the company have no real impact on each other and fail to make each other more efficient.
• Lack of synergy means managers are splitting their time between areas which are so different it could lead to diseconomies of scale

Question 4

What are diseconomies of scale?

Answer 4

• When the expansion of output comes with increasing average costs

Question 5

How does the value of the company/ share price cause demergers?

Answer 5

• The value of the separate parts of the company is worth more than the company combined.
• This is because some parts of the business are operating well and have potential to grow but the overall value is brought down because of the lack of success or lack of potential for growth of other parts of the business.

Question 6

How do focused companies cause demergers?

Answer 6

• Some people believe if the company and the management are more focused on individual markets, they can become more efficient and successful.
• Management have limited time and skills and they are unable to spend the required time to make all areas of a huge diverse business successful.

Question 7

What are the impacts of demergers on workers?

Answer 7

• Separate firms may need their own managers, so people could get a promotion.
• However, the goal of making the firm more efficient may result in job losses.

Question 8

What are the impacts of dermergers on businesses?

Answer 8

• Focusing on a smaller core business may enable it to be more efficient.
• Concentration may lead to more innovation an surviving higher competition.
• However, the smaller size of the business could lead to a loss of economies of scale and reduce efficiency.

Question 9

What are economies of scale?

Answer 9

• The cost advantages companies gain from increasing their output.

Question 10

What are the impacts of demergers on consumers?

Answer 10

• Consumer could gain with better products and cheaper prices, due to higher innovation and efficiency
• However, demerged firms may be less efficient through loss of economies of scale or raise prices/ reduce quality or range of goods as they become motivated by profits.