Reasons for Demergers
- 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
Reasons For Demergers
Reducing diseconomies
|
Increased business focus |
Cultural differences |
| Decreasing the size of the firm can reduce the diseconomies & lower the cost/unit which increases the profitability | If efforts & resources are scattered across a large number of firms/ industries it can be hard to maintain focus and profitability. Narrowing the focus can improve profitability | The most common reason for failures of mergers is cultural differences. Sometimes these differences are irreconcilable & not worth the expense to change |
Remove loss making divisions |
Increase liquidity & dividend payments |
Comply with the demands of the Competition Commission |
| It can be more profitable to remove loss-making divisions and replace them with outsourcing | Demergers generate extra revenue for the firm in the year they occur. This may increase the profit & dividend payments | Sometimes firms are forced to demerge by the competition regulator due to concerns about the high level of market share they may have, which is considered to be anti-competitive & bad for consumers |
Impacts of Demergers on Stakeholders
- The impacts on the firm conducting the demerger should be mostly positive and include
- 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
- The impacts on employees include
- Some workers may lose their jobs
- Reduced friction from cultural differences can help build better team dynamics
- Smaller workforce provides more opportunity for promotion
- Less complication in daily tasks due to more narrow focus
- The impacts on consumers include
- If successful, better quality products & customer service
- If successful, lower prices due to the firms new efficiencies
- If unsuccessful, a narrower product range & perhaps worse quality/customer service
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