3.1 - Demergers

Question 1

What is a business demerger?

Answer 1

Process of business separation, former partners become independent

Question 2

What are the primary reasons for a demerger?

Answer 2

Focus on core business
Reduce risk of diseconomies of scale + scope
Generate income from asset sales
Defensive tactic

Question 3

How does a demerger allow focus on core businesses?

Answer 3

Less assets
Streamlines costs
Margins more profitable

Question 4

How does a demerger act as a defensive tactic?

Answer 4

Disengages attention of competition authorities
Monopoly prevention

Question 5

How does a demerger reduce risk of diseconomies? (Scale + Scope)

Answer 5

Reduced management costs (Scale)
Restricts product variety + streamlines efforts into core product (Scope)

Question 6

When does a diseconomy of scope occur?

Answer 6

When a firm producing >2 goods experiences a rise in cost or fall in productivity, such that firms producing each individual good have higher and faster output

Question 7

When do economies of scope occur?

Answer 7

Firms experience lower costs/higher productivity by producing >2 goods simultaneously rather than individually

Question 8

What are the impacts of demergers on consumers?

Answer 8

Primarily affects prices
Dependent on scale of competition

Question 9

What are the impacts of demergers on employees?

Answer 9

Large influx/loss of jobs - Depends on purpose
Management opportunities in new independent firms

Question 10

What are the short term effects for a business?

Answer 10

Short run cost due to selling of business/sector
Probably some sunk costs

Question 11

What are the long term effects for a business?

Answer 11

Higher total returns