3.1.3 Demergers

Question 1

Demergers

Answer 1

A demerger is a business strategy in which a ​single business is broken into two or more components​, either to operate on their own, to be sold or to be dissolved.
Example: In 1997, Pepsi announced a demerger of its Pizza Hut, KFC and Taco Bell restaurants to focus on competition with Coca Cola. This was welcomed by shareholders as the restaurants had failed to live up to expectations.

Question 2

Demerger example

Answer 2

In 1997, Pepsi announced a demerger of its Pizza Hut, KFC and Taco Bell restaurants to focus on competition with Coca Cola. This was welcomed by shareholders as the restaurants had failed to live up to expectations.

Question 3

Reasons for demergers (4)

Answer 3

Lack of synergies
Value of the company/ share price
Focused companies
Competition authorities

Question 4

Lack of synergies - reasons for demergers

Answer 4

This is 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; firms may split in order to avoid these diseconomies.

Question 5

Value of the company/share prices

Answer 5

Some companies demerge because 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. Financial markets talk about ‘creating value’ by splitting up companies like this.

Question 6

Focused companies - reasons for demergers

Answer 6

Some people believe if the company and the management are more focussed on individual markets they become more efficient and successful, and make higher profits. 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. By focusing on one area, managers can improve their skills and knowledge and become more successful.

Question 7

Competition authorities - reasons for demergers

Answer 7

They may also want to avoid attention from the ​competition authorities​.

Question 8

Impacts of demerging on: Workers

Answer 8

Workers could gain or lose through a demerger:
- Separate firms may need their own managers and leaders so people could get a ​promotion.
- However, the goal of making the firm more efficient may result in ​job losses​.

Question 9

Impacts of demerging on: Businesses

Answer 9

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

Question 10

Impacts of demerging on: Consumers

Answer 10

Consumers could gain or lose:
- They may gain from innovation and efficiency, leading to ​better products and cheaper prices.
- 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.