De-mergers | tutor2u Economics
Study notes

De-mergers

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

De-mergers have become more common in recent years

Business demergers - revision video

A de-merger happens when a firm decides to split into separate firms e.g. by spinning off / selling parts of their business

A partial demerger means that the parent company retains a stake in the demerged business

De-mergers can also result from government intervention - for example BAA has been compelled by the UK Competition Commission (now known as the Competition and Markets Authority) to sell off some airports in Britain including Gatwick & Stansted

Some of the key business motivations for de-merger include:

  1. Focusing on core businesses to streamline costs and improve profit margins
  2. Reduce the risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, lower management costs
  3. Raise money from asset sales and return to shareholders
  4. A defensive tactic to avoid the attention of the competition authorities who might be investigating possible monopoly power in an industry / market

Recent examples of de-mergers

  • US food giant Sara Lee sold off coffee business Douwe Egberts
  • Qantas de-merged their airline business and run stand-alone domestic and international airline businesses
  • News International demerged Film/TV & Publishing businesses
  • Demerger of Clydesdale and Yorkshire banks
  • Pfizer sold their infant nutrition business to Nestle
  • Severn Trent Water demerged the waste management firm Biffa
  • PepsiCo demerged their food and drinks business by creating Yum Brands (which owns KFC, Pizza Hut and Taco Bell)
  • In 2015 Yum Brands announced a demerger to create two separate businesses: Yum China and Yum Brands
  • Sports Direct selling their Dunlop brand
  • April 2018, Whitbread plc announces plan to de-merge Costa Coffee from their stable of businesses
Whitbread to spin off Costa Coffee from its other interests to please investors.

Economic Impact of De-Mergers

Businesses

  • Long term – higher returns as cost savings are made
  • Short term cost of hiving off the business

Employees

  • Expected job losses – due to a process of rationalization
  • Opportunities for managers of the newly demerged business e.g. if there is a management buy-out of the business being sold

Consumers

  • Impact on consumer prices depends on scale of competition + possible lost economies of scale which leads to higher unit costs

Why many takeovers fail - revision video

Why many takeovers fail - revision video

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