Business Demergers

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)