Topic Videos

Business Demergers

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 15 Oct 2020

This video looks at some of the reasons for business demergers and also some topical recent examples.

What is a demerger?

A de-merger is when a firm decides to split into separate firms

Motivations for a de-merger might include:

  1. Focusing on core businesses to cut average costs and therefore improve profit margins & returns to shareholders – this might involve selling-off loss-making subsidiaries
  2. Reduce the risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, and achieve lower management costs
  3. Raise money from asset sales and return to shareholders
  4. A defensive tactic to avoid the attention of competition authorities who might be investigating monopoly power

Topical examples of business demergers

  • Pfizer selling their infant nutrition business to Nestle.
  • Severn Trent Water demerged the waste management firm Biffa.
  • PayPal splitting from eBay in 2014.
  • Costa Coffee sold by Whitbread to Coca Cola
  • Frasers Group (owner of Sports Direct, Evans Cycles and Jack Wills) selling their Dunlop brand.
  • Tesco selling off its Polish business having already de-merged many of their Asian retail operations
  • Prudential demerging their M&G Investment Fund business
  • AP Moller-Maersk (Denmark) demerged their energy assets from its shipping business
  • Walmart, the US-based retail giant selling Asda (October 2020)

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