3.1.3- Demergers

Question 1

What is a demerger?

Answer 1

The breaking up of business into two seperate firms. It is the opposite of a merger.

Question 2

What is merger?

Answer 2

When two or more businesses join.

Question 3

Why do demergers occur? (3)

Answer 3

When firms face disadvantageous situations from
- Expanding into different markets
- Releasing money to pay investment loans, or even to reinvest
- Having poorer performing sectors which bring down the total value of the firm and subdue the boom of other sectors

Question 4

What may demergers result in? (2)

Answer 4

A greater increase in share price, because the lesser performing part is removed. Demergers also help each smaller firm to focus on a specific market, hence increasing their productivity.

Question 5

What are the pros of demergers for businesses? (4)

Answer 5

• Businesses may become more efficient once demerged due to being able to focus on improving production processes, as more effort and concentration can be placed on busier and profitable sections.
• Although economies of scale can be reduced, a reduction in diseconomies of scale may also arise
• Greater independence as demerged firms are able to negotiate own contract instead of relying on the parent companies
• The overall market value of the firm can increase

Question 6

What are the cons for businesses? (1)

Answer 6

• Selling off unprofitable parts of a firm could be difficult to execute, and can create huge losses which can be detrimental to their image

Question 7

What are the pros for workers? (2)

Answer 7

• More jobs are created within the economy as hiring of HR, financial staff etc. could be required for each demerged business
• Smaller demerged businesses will have fewer employees, which can improve manager worker relations

Question 8

What are the cons for workers? (2)

Answer 8

• Job uncertainty or losses if restructuring occurs
• Workers may get a reduction in wages if they are relocated to the poor performing sector’s smaller branch

Question 9

What are the pros for consumers? (3)

Answer 9

• Improved consumer choice as competition increases
• Less confusion for consumers as to what each business does
• Consumers may benefit from smaller businesses which are focused on their needs

Question 10

What are the cons for consumers? (1)

Answer 10

• Service quality might fall in periods of business transition

Question 11

What is a lack of synergy?

Answer 11

When there is no synergy, there could be diseconomies of scale due to managers being forced to divide their time between multiple firms which may have little to no relation. This is often more prevalent in conglomerates.

Question 12

What is it called when demerged businesses are worth more on the stock exchange than the merged firm?

Answer 12

Creating value

Question 13

Why does demerging help firms to be focussed?

Answer 13

• They can focus on a single area and invest more resources into it
• It is easier for managers as they are required to oversee less and can be more knowledgeable
• By investing more, firms can be more knowledgeable about trends, and can exploit them to gain more market share
• More investment can drive innovation and increase the value of goods