Demergers

In its widest sense, a demerger occurs when a single business is split-up into two or more independently operated business units. If the company simply sells one of the existing parts or divisions to another company, it is called a demerger. A 'spin-off' is a type of demerger where the business splits but the 'parent' retains some ownership (in terms of equity) of the spin-off company.

Demergers could be as a result of reversing an earlier merger, or simply restructuring a business that is not operating efficiently as a single business unit.

Examples

Examples of demergers include PayPal splitting from eBay in 2014. Also in 2014 Hewlett-Packard split into Hewlett Packard Enterprise, supplying servers and other services, and HP Inc, selling PCs and printers. British Telecom (BT) separated with its mobile telecoms provider BT Cellnet, which later became 02, and demerged again to create Openreach in 2017 (to service BT's network).

MOTIVES FOR DEMERGERS
  1. Realisation that diseconomies outweigh any economies of scale
  2. A previous merger has proved too difficult to complete in a reasonable timeframe
  3. Conflicts between business cultures or ethics
  4. A demerger could increase the stock market value of the separated businesses in comparison with remaining one business
  5. Demerged firms may be able to refocus on their core markets
  6. A demerger could be requested by a competition regulator
  7. Loss of 'strategic fit' where an existing brand or product no longer fits with the strategy of the business

The impact of a demerger

Demergers may have the following effects, positive and negative:

EFFECTS ON THE FIRM
  1. Demerged firms can focus on their core market, and specialise
  2. Specialisation might make them more efficient
  3. No need for cross subsidisation of poorly performing divisions/products
  4. Management may be more accountable in a demerged business, however:
  5. There could be a loss of previous economies of scale
  6. Potential synergies will be lost
  7. Costs associated with the demerger
EFFECTS ON EMPLOYEES
  1. Some employees may be rewarded with higher pay or 'non-pecuniary' [non-monetary] benefits
  2. There may be more opportunities for promotion, however:
  3. Some may lose their jobs during or following the demerger
  4. Employees may have no choice in which demerged firm they are employed by
EFFECTS ON CONSUMERS
  1. Customer satisfaction may improve as the demerged businesses can focus more on their market
  2. Quality may be driven up as business focuses on customer wants and needs, however:
  3. Prices might be driven up as economies of scale are lost
  4. Possibly less choice if demerged firms get rid of certain products or services

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