3.1.3 - Demergers

Question 1

What are some reasons for demergers ?

Answer 1

Business and managers may lose focus and control over day-to-day management of the firm and therefore long-run average costs may tend to increase. May lead to the firm demerging.

Question 2

What does a firm demerging lead to ?

Answer 2

This may then create a number of smaller firms, all able to concentrate on their specialist areas and maximise their own economies of scale and, with that, increase shareholder value and profits.

However it could also lead to a loss of jobs

Question 3

Why are demergers sometimes required by the government ?

Answer 3

Sometimes demergers are required by governments because the business is seen to be acting against the public interest.

Question 4

What can a demerger cause for a business ?

Answer 4

• The impact on the business is to make it smaller, which might mean it has less control in the market (reduction of market share) and less monopoly power.
• This might make the business less profitable, but it might also make it more profitable if it becomes more efficient

Question 5

How can a demerger affect workers ?

Answer 5

Senior managers may gain promotion

If each firm becomes more efficiently run as a result of the demerger, them some job losses are likely.