3.1.3 Demergers

Question 1

Demergers

Answer 1

When a firm sells off at least one of the businesses it owns, or splits itself into separate parts to create two or more firms.

Question 2

Reasons for demergers

Answer 2

• Reducing diseconomies of scale
• Increased business focus
• Cultural differences
• Remove loss making divisions
• Increase liquidity and dividend payments
• Comply with the demands of the competition

Question 3

Impact of demergers on workers

Answer 3

• There may be an improvement in manager-worker relations as a smaller, demerged firm will have fewer employees.
• More jobs might be created as, for example, a demerged firm may need to hire marketing, finance and human resources staff.
• Workers may lose morale if the situation surrounding a demerger isn’t explained clearly to them.

Question 4

Impact of demergers on consumers

Answer 4

• There’s likely to be improved consumer choices as competition will increase, and this may cause prices to fall.
• Consumers will be less confused as to what each company does.
• Consumers are likely to benefit from having smaller firms that are more focused on their needs.

Question 5

Impact of demergers on businesses

Answer 5

• A demerged firm may become more efficient and be able to focus on improving its production process.
• Any economies of scale will be reduced, but there may also be a reduction in any diseconomies of scale.
• A firm will have greater independence – for example, a demerged firm can negotiate its own contracts rather than relying on its parent company.
• A firm’s market value if likely to increase compared to its value when it was part of a larger organisation.
• Selling off an unprofitable part of a firm is difficult, and it may have to be sold at a loss. This could harm the image of the demerged firm and make shareholders unhappy.