NEW ROUND

Question 1

Demerges

Answer 1

A demerger happens when a firm decides to split into separate firms, e.g. by selling off parts of their business
Demergers can also be a result of government intervention

Question 2

Mergers Disadvantages to firms (reasons to demerge)

Answer 2

Horizontal
• Diseconomies of scale
• Regulators may block as creates too much market power
• Synergies may not materialise, meaning benefits of combining never happen
• Possible over-exposure to risk, as a result of commitment to one industry
Vertical
• Lack of flexibility (must supply to certain shop, or get produce from certain supplier)
• Lack of expertise at different stages of the production process
• Harder to co-ordinate different parts of the business which may cause inefficiency
Conglomerate
• Lack of expertise in new markets can lead to higher costs and inefficiency
• Lack of ‘synergies’ where elements of the businesses can benefit each other
• Dilution of brand is possible (but not always – ie Virgin)