Study Notes

Business De-mergers

AS, A Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 22 Nov 2021

This study note looks at the economics of de-mergers. A de-merger is when a firm decides to split into separate firms

What are some of the main motivations for a business de-merger?

Some of the key motivations for de-merger include:

  1. Focusing on core businesses to cut costs and therefore improve profit margins & returns to shareholders.
  2. Reduce the risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business and thereby achieve lower management costs.
  3. Raise money from asset sales and return it to shareholders who have equity in the business.
  4. A defensive tactic to avoid the attention of competition authorities who might be investigating market power.

Recent examples of de-mergers / planned de-mergers

  • Pfizer selling their infant nutrition business to Nestle.
  • Severn Trent Water demerged the waste management firm Biffa.
  • PayPal splitting from eBay in 2014.
  • Frasers Group (owner of Sports Direct and Evans Cycles) selling their Dunlop brand.
  • Prudential demerging their M&G Investment Fund business
  • Walmart, the US-based retail giant, stated an aim to sell a majority stake in Asda following the UK competition regulators' decision in 2019 to block a proposed merger with rival Sainsburys. This happened in October 2020.
  • Travis Perkins de-merging their Wickes brand

Impact of demergers on businesses, workers and consumers

  • Businesses:
    • Long term – higher returns / operating profits.
    • But short-term cost of selling off a part of their business.
  • Employees:
    • Expected job losses if demerger is driven by a desire to control unit costs – although new jobs might be created e.g. arising from a successful management buy-out of a demerged business.
    • Opportunities for managers of newly demerged business.
  • Consumers:
    • Impact on prices depends on the effect of a demerger on the intensity of industry competition.
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