Demergers

Question 1

What is a demerger?

Answer 1

A demerger is when a large firm is separated into multiple smaller firms.

Question 2

What are some reasons for demerging?

Answer 2

• Growth: Each part of the firm could grow at different rates. The faster growing part might be separated.
• Diseconomies of scale: If the firm is so large that average costs rise with more output, the firm might choose to split.
• Finance: Selling off part of the firm can raise valuable finance, which could be better invested in a more profitable part of the firm.
• Focussed companies: The firm might be able to grow faster if it focuses on a few markets, rather than several.
• Tactical: A defensive tactic used to avoid the attention of competition authorities, who may be investigating a possible monopoly power in the industry/market.