3.1.3 Demergers Flashcards
What is a demerger?
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.
What are 4 core reasons for demergers?
- Lack of synergies
- Value of the company / share price
- Focussed companies
- Avoiding the Competition authorities
How does a lack of synergy result in a demerger?
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
Why is the value of a company / share a reason for demerging?
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
Why are “focussed companies” a reason for a demerger?
Sometimes, it is believed that if the company is split up and able to focus on individual markets they become more efficient and successful and make higher profits.
- This is essentially the specalisation of managers.
What are the impacts of a demerger on workers?
Workers can both benefit and lose out from demergers.
People could get promotions but also lose their jobs.
What are the impacts of demergers on businesses?
Concentrating on a smaller core business may enable it to be more efficient and concentration may lead to more innovation.
- However, if the firm becomes too small as a result of a demerger, they could lose out on diseconomies of scale.
What is the impact of demergers on consumers?
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.
