3.1.3 - Demergers

Question 1

What are Demergers? (2)

Question 2

What are the Reasons for Demergers? (6)

Answer 2

1. Lack of Synergies
2. Growth - Each part of the firm could grow at different rates, the faster growing part might be separated
3. Diseconomies of Scale - If the firm is so large that average costs rise with more output, the firm might choose to split.
4. Focussed Companies - The firm may be able to grow faster if it focuses on a few markets, rather than several
5. Resources - If a firm can no longer afford to invest in the business, due to a lack of resources, they may sell off a part of itself.
6. Finance - selling off parts of the firm can raise valuable finance that can be spend in a more profitable area of the firm.

Question 3

What is the Impact of Demergers on Businesses?

Answer 3

Sure! Here’s a brief summary of the impacts of demergers on businesses:

1. Focus on Core Activities:

Firms can concentrate on their main areas by shedding underperforming parts.

2. Market Adaptation: Businesses can better cater to their specific markets.
3. Elimination of Diseconomies of Scale:
   Smaller entities improve control and coordination.
4. Financial Benefits: Parent Firm can use proceeds from demerging and selling a part of the firm to invest in other parts of itself.

Question 4

What is the impact of Demergers on Workers?

Answer 4

1. Workers may become confused, and their roles might be shifted between the demerged firm and the parent firm.
2. There could also be job cuts, as the new firms readjust their priorities.

Question 5

What is the impact of Demergers on Consumers? (3)

Answer 5

1. Removal of Diseconomies of Scale could lead to lower prices of consumers
2. Net Welfare Gain if demergers results in a higher level of efficiency
3. If two firms in the same industry/production stage demerge, such as two airlines, it would increase choice for consumers.