Demergers

Question 1

What is a demerger?

Answer 1

The separation of a business into different companies, or the selling of one or more business to another firm.

Question 2

What are 8 reasons why a firm may demerge?

Answer 2

1) Cultural differences, as they can cause inefficiency and a lack of integration.
2) A lack of synergies, causing diseconomies of scale.
3) To raise money from asset sales and return to shareholders.
4) If the value of the companies demerged is higher than the value of the singular integrated company.
5) To maximise profits.
6) To create a smaller, more focused firm, that is better able to identify the needs of consumers/the market.
7) To reduce the risk of diseconomies of scale.
8) To meet the requirements of competition authority regulators.

Question 3

What are 4 benefits of a demerger to businesses?

Answer 3

1) Allows focus on the core business.
2) Raises funds from selling part of the business.
3) Removes loss-making parts of the business.
4) An increase of efficiency and profitability.

Question 4

What are 3 benefits of a demerger to workers?

Answer 4

1) Increased job security, if loss-making parts of a firm are demerged.
2) Reduced conflict between cultures.
3) The split may lead to the creation of new jobs in the separated firms.

Question 5

What is 1 drawback of a demerger to workers?

Answer 5

The split may lead to job losses in the original company.

Question 6

What are 2 benefits of a demerger to consumers?

Answer 6

1) Greater competition in the market, resulting in lower prices.
2) More focused businesses are better able to meet consumer needs.

Question 7

What are 2 potential drawbacks of a demerger to consumers?

Answer 7

Potential higher prices, and reduced product range.