Demergers (3.1.3) Flashcards
What is a Demerger?
Occurs when a firm sells off at least one of the businesses it owns, or splits itself into separate parts to create two or more firms
What are the reasons for a demerger?
-Decreasing the size of the firms reduces DEofS and lowers unit costs which increases profitability
-Increased business focus as narrows down efforts and resources to maintain focus and profitability
-Cultural differences which are irreconcilable and not worth the expense to change
-Can be more profitable to remove loss-making divisions and replace with outsourcing
-Create extra revenue which increases their profit
-Avoid attention from competition authorities
What are the impacts of Demergers on the firm? (P+N)
-Opportunity for a more narrow focus on the core business
-Removing loss-making portions of the business
-Increased efficiency and lower costs/unit
-Increasing the annual profits for the year that the demerger occurred
-Removing some difficult cultural differences
-More innovation
-Loss of Economies of scale
What are the impacts of Demergers on employees?
-Some workers may lose their jobs
-Reduced friction from cultural differences can help build better team dynamics
-A smaller workforce provides more opportunity for promotion
-Less complications in daily tasks due to more narrow focus
What are the impacts of Demergers on consumers?
-If successful, better quality products and customer service
-If successful, lower prices due to the firms new efficiencies
-If unsuccessful, a narrower product range and perhaps worse quality/customer service
What’s a real-life example of a demerger?
A well-known real-life example of a demerger is eBay and PayPal. In 2015, eBay decided to spin off its PayPal business into a separate company. This demerger allowed PayPal to focus on its digital payment services and innovate independently, while eBay could concentrate on its online marketplace.
