Demergers Flashcards
What is a demerger?
Separation of larger firm into 2 or more smaller organisations
What is a horizontal demerger?
Firms splitting at the same point of the production process
What is a vertical demerger?
Firms splitting at different stages of the production process
Why do demergers happen?
When a firm grows too large- experience diseconomies of scale- business and managers may lose focus and control over day to day management-> ⬆️ in LRAC
What benefits do demergers bring to shareholders?
The smaller firms created will be able to concentrate on their specialist areas and maximise economies of scale … cost savings-> ⬆️ shareholder value and profits
What is the impact of a demerger on the business/firm?
Makes business smaller- … less control in market (⬇️ market share)-> ⬇️ monopoly power- business ⬇️ profitable OR ⬆️ profitable if ⬆️ efficient (least profitable/loss making areas of business sold)
What is the impact of a demerger on the workers?
Main losers- may be forced to move location (due to change in ownership potentially)- may even lose job if new owners have workers in similar roles already
What is the impact of a demerger on the consumers?
Short term problems- name of firm may change, the way it operates or branches of the firm may close
Long term benefit- intended (if instigated by government) to create ⬆️ competition-> ⬇️ prices and ⬆️ choice
What are the advantages to firms of a horizontal demerger?
Removal of diseconomies of scale
What are the disadvantages to firms of a horizontal demerger?
Share price might ⬇️
Give an example of a horizontal demerger
BHP (mining company) sold its shale oil and gas ⛽️ assets to BP in 2018
What are the disadvantages to firms of a vertical demerger?
Cost savings gained from having your own supplier as well as assured supply in terms of timing and quality lost if not replaced
What are the advantages to employees or other stakeholders of a horizontal demerger?
Smaller business is easier to manage
What are the disadvantages to employees or other stakeholders of a horizontal demerger?
Some may lose jobs as some parts of the business are sold or gotten rid in demerger
What are the advantages to employees or other stakeholders of a vertical demerger?
Can focus on core product being sold- greater focus on consumer side of things- focus on consumer preference-> ⬆️ sales and profits
