3.1.3 Demergers

Question 1

Demergers

Answer 1

When a business sells off one or more of businesses that it owns into a separate company

Question 2

Demerger example

Answer 2

In 1997, Pepsi announced a demerger of its Pizza Hut, KFC & Taco bell restaurants to focus on competition with Coca Cola

Question 3

Reasons for demergers

Answer 3

• cultural differences
• creating more focused firms
• protecting the value of the firm
• reducing the risk of diseconomies of scal
• raising money from asset sales
• return to shareholders to meet requirements of competition authority

Question 4

Reasons for demergers (creating more focused firms)

Answer 4

Some people believe if the company/management are more focused on individual markets they become more efficient & successful, & make higher profits. If they have a huge diverse business management can’t spend time on it (since they have limited time & skills) but by focusing on one area, managers can improve their skills and knowledge & become more successful

Question 5

Reasons for demergers (protecting the value of the firm)

Answer 5

Some companies demerge because the value of the separate parts of the company is worth more than the company combined. This is because some parts of the business are operating well & have potential to grow but the overall value is brought down due to lack of success of other parts of business

Question 6

Reasons for demergers (reducing the risk of diseconomies)

Answer 6

Sometimes different parts of the company have no real impact on each other & fail to make each other efficient. Lack of synergy means managers are splitting their time between areas which are so different = diseconomies of scale

Question 7

Return to shareholders to meet requirements of competition authority example

Answer 7

TSB & Lloyds Bank, two separate banks

Question 8

Positive impact of demergers no businesses

Answer 8

• allowing focus on the core business = more efficient & concentration = more innovation & surviving high competition
• raising funds from selling part of the business
• removing loss making parts of the business

Question 9

Positive impact on workers

Answer 9

• increase job security if loss-making parts of the business are demerged
• separate firms may need their own managers so people could get promotion
• decreased conflict between cultures
• increased focus on the business to enable it to be more profitable
• greater competition = decreased price
• more focused businesses can better meet consumer needs

Question 10

Negative impact of demergers on businesses

Answer 10

• but could lead to a loss of economies of scale & reduce efficiency

Question 11

Negative impact of demergers on workers

Answer 11

• if firms get more efficient = job losses
• however can be less efficient = loss economies of scale/ increased price/ decreased quality

Question 12

Reasons for merging

Question 13

Cultural differences

Answer 13

• Differences within the two businesses cultures = demergers
• culture is the main aspect of how a business operates
• if the merged businesses cultures are incompatible with one another= inefficiency and lack of integration.
• it may be better for the business to demerge in order to improve business operations.

Question 14

What are some advantages of mergers to consumers?

Answer 14

• fast growth= lower prices and increased consumer surplus
• economies of scale = dynamic efficiency

Question 15

Example of merger

Answer 15

• Amazon and Whole Foods
• 2017
• concerns about the effects of increasing market concentration in a variety of US industries (food retailing, airlines, banking)
• amazon is monopoly in US online commerce market

Question 16

How can mergers lead to lower consumer prices?

Answer 16

• business objective = growth/sales max (AC=AR)
• consumer surplus

Question 17

Evaluation of merger leading to increased consumer surplus

Answer 17

• the market power of Amazon neg impact on other competitors/suppliers/consumers
• many jobs have been loss due to Amazon’s power e.g Toys R Us
• smaller retailers unable to cope with the low-cost strategy of Amazon = decline of high street

Question 18

How can mergers lead to economies of scale?

Answer 18

• Amazon’s internal economies of scale & efficiency in purchasing, logistics and delivery = lower LRAC = increase speed & reliability of their services
• gains in productive & dynamic efficiency = improve outcome for consumers

Question 19

evaluation of merging leading to economies of scale

Answer 19

• Amazon might use their monopsony power to lower prices paid to supplies lower wages since no competitive labour market