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3.1.3 Demergers

Demergers 


Reasons for demergers


  • Diseconomies of scale - the opposite of economies of scale, where average costs begin to rise as output increases. May occur due to it being difficult to retain control on the expanding business - principal-agent problem may arise. Also less co-operation by employees who feel more alienated and as a result less productive - they feel less of a connection to the business. 
    • May also be hard to co-ordinate and communicate between locations and employees when a firm is large. Miscommunication can again lead to costs rising. 
  • To focus on core businesses to streamline costs and improve profits. The firm may have expanded into different markets and experience disadvantages due to this. May not be as experienced in this market. Demerging allows each smaller firm to focus on a more specific market and make more profit collectively than they did as a single firm. 

 NB: Sometimes a firm will sell off a 'weak' part of the business that is making little or no profit. This is in the hope profits increase once it is gone as the firm becomes more focussed. 

 It may be expected there will be an increase in share price where total value of demerger firms is greater than the initial firm. 
  • To release money to pay off business loans, reinvest in the firm, or return to shareholders. 
  • The benefits of the merger didn't materialise. 
  • In response to/to prevent government intervention by the CMA (or FTC in the US). Companies can be forced to demerge if they are deemed to have too much monopoly power. They also may choose to preemptively to avoid attention from competition authorities. 

Impact of demergers on businesses, workers, consumers

Businesses: 

Greater efficiency due to greater focus and greater investment into its production processes. 

Greater independence 
e.g doesn't need to rely on parent company to negotiate contracts. 

Diseconomies of scale (as well as economies of scale) reduced. 

Market value of firm may increase compared to when it was part of larger company. 

But if the firm was sold off due to it being unprofitable, may have been sold at a loss, which could harm the brand image and make shareholders unhappy. 


Workers:

May become more involved in the business/less alienated as manager-worker relations become more intimate due to there being less employees. 

More jobs may be created due to a reduction in economies of scale meaning opposite of economies of linked processes occurs - new marketing, HR, accounting, etc. employees need to be hired. 

 But there may also be job losses as the firm becomes increasingly focussed/rationalises. 

Workers may lose morale/become alienated if situation behind demerger isn't explained. 


Consumers: 

Likely to benefit from greater consumer choice, and lower prices as competition increases. 

Will benefit from having smaller firms more focussed on their needs.  
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