Demergers

Question 1

What is the definition of demerger?

Answer 1

A demerger happens when a firm decides to split into separate firms.

Question 2

Give an example of a demerger?

Answer 2

Firms selling off parts of their business.

Question 3

Give two reasons for a demerger?

Answer 3

• Focusing on core businesses to streamline costs and improve profit margins
• Reduce risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, lower management costs.

Question 4

Give a further two reasons for a demerger?

Answer 4

• Raise money from asset sales and return to shareholders
• A defensive tactic to avoid the attention of the competition authorities who might be investigating possible monopoly power in an industry/ market.

Question 5

What are the impacts of demergers on consumers?

Answer 5

Increased competition in the market drives down prices and increases choice.