3.1.3 Demergers

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 of scale	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

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