3.1.3: Demergers

Question 1

What is a demerger?

Answer 1

The ‘breaking off’ of components of a firm (either to operate alone, or to be sold/dissolved).

Question 2

What are the reasons for demergers?

Answer 2

•Lack of synergies.
•Value/share price.
•Focus.
•Avoid attention from competition authorities.

Question 3

How is lack of synergies a reason for demergers?

Answer 3

When different parts of the company have no real impact on each other, demergers can help combat diseconomies of scale (e.g. managers won’t have to split time between different areas anymore).

Question 4

How is value/share price a reason for demergers?

Answer 4

Some parts may have growth potential that is hindered by other parts of a business. Separate parts of a company may be worth more than the company combined.

Question 5

How is focus a reason for demergers?

Answer 5

By focusing on individual markets, companies can become more efficient and successful, resulting in higher profits.

Question 6

What are the impacts of demergers on firms?

Answer 6

-Specialisation and innovation increases survival chances in greater competition.
-Loss of economies of scale.

Question 7

What are the impacts of demergers on workers?

Answer 7

-Job gains as more workers are required.
-More senior management roles (more chances of promotion).
-Job losses for efficiency reasons.

Question 8

What are the impacts of demergers on consumers?

Answer 8

-Impact depends on scale of competition.
-High innovation/efficiency results in better, cheaper products.
-Monopolies result in higher prices.

Question 9

What are examples of demergers?

Answer 9

•Asda - Walmart.
•PayPal - eBay.