3.1.3 Demergers

Question 1

What are demergers?

Answer 1

A demerger is a business strategy in which a single business is broken into two or more components, either to operate on their own, to be sold or to be dissolved

Question 2

What are the reasons for a demerger?

Answer 2

Lack of synergies
Value of the Company/Share Price
Focussed Companies
To avoid attention from the competition authorities

Question 3

Why is a lack of synergy a reason for a demerger?

Answer 3

Different parts of the company have no positive impact on each other so not making each other more efficient or productive

Question 4

What does a lack of synergy lead to?

Answer 4

A lack of synergy means senior management splits time between areas leading to diseconomies of scale, causing higher production costs

Question 5

What are diseconomies of scale?

Answer 5

Diseconomies of scale occur when a company’s average cost per unit increases as it produces more output

Question 6

Why is the value of the company a reason for a demerger?

Answer 6

The value of a demerger firm may be worth more than the price of the single larger firm

Question 7

How can a demerger firm be worth more than a single larger firm?

Answer 7

Investors could value a smaller part of a firm higher as it has more potential to grow whereas another part may lack success and so have a lower share price

Question 8

Why are focussed companies are reason for a demerger?

Answer 8

If a company and management focus on individual markets, they become more efficient and successful making higher profits through improvement of skill and knowledge

Question 9

How can a company become more focussed?

Answer 9

By divesting parts which do not fit in with their core activities

Question 10

How do demergers avoid competition authorities?

Answer 10

Firms could choose to demerge in order to avoid attention from competition authorities

Question 11

What are the impacts of demergers on workers?

Answer 11

Separate firms need more managers leading to more promotions
Workers may lose jobs if each firm runs more efficiently as a result of the demerger

Question 12

What are the impacts of demergers on business?

Answer 12

Concentrating on smaller businesses enable more efficiency and may lead to innovation and surviving higher competition
Smaller businesses lose economies of scale decreasing profits

Question 13

What are the impacts a demerger on consumers?

Answer 13

Increased efficiency lowers prices
Investment in innovation increases consumer choice
Profit maximisation can raise prices/reduce choice