What are Demergers? Its Pros and Cons
Mergers and demergers are forms of corporate restructuring and are products of strategic restructuring that take place within an organization. Although the two terms are used interchangeably, they are in fact strikingly different. A merger refers to a situation whereby two or more companies come together to form a single bigger entity whereas a demerger occurs when an already existing company splits into two or more new companies. Demergers are also known as spinoffs, divestitures, or split-offs. Read on to learn all about demergers and their pros and cons.
What is a Demerger?
A demerger is the process of splitting up an existing company into two or more new companies, to allow for better organization. Demergers aim to maximize shareholder value by reorganizing a company’s existing operations and resources. Through a demerger, organizational activities are restructured to create separate entities that are able to operate independently. The demerger can be used to separate a dominant business unit from a less profitable one, or to separate two or more distinct business activities.
Pros of a Demerger
For a demerger to be successful it must be an integral part of a company’s strategic objectives. Here are some of the pros of demergers:
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Increase Shareholder Value: Demergers allow shareholders to diversify their investments, as they can now hold shares in two or more companies. If the companies are of good quality, the shareholder stands to benefit from a higher return on investment.
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Enhance Focus: Splitting a company into more focused and specialized entities allows for greater focus and efficiency. This can create new opportunities for both the parent and the resulting companies.
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More Flexibility: Demerging allows for more flexibility when it comes to business operations and strategy, as the focus in each entity can be built to suit the industry.
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Unlock Hidden Value: By removing the integrated cost structure of the parent company, demergers can unlock hidden value. The companies that result from the demerger can do so more efficiently and effectively, as each has its own distinct cost structure.
Cons of a Demerger
As with every restructuring exercise, demergers are also accompanied by some cons. Here are some of the cons of demergers:
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Extra Cost: Demergers involve significant restructuring costs, which can lead to reduced profitability. The costs are related to the restructuring process and include legal costs, transaction costs, and others.
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Racial Discrimination: Demergers can cause racial discrimination. During a demerger process, racial or gender issues can arise as certain individuals or groups may be targeted to help move the process along.
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Decrease in Assets: Since asset values are re-allocated in a demerger, some assets may be sold off at a discount in the process. This can result in a decrease in the overall value of the assets.
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Cultural Dissonance: Demergers can create cultural dissonance which can lead to internal conflicts within the company. There may be a clash between the cultures of the resulting companies and it can be difficult to align them.
Demergers are an important form of corporate restructuring that can be beneficial, if done correctly. Demergers allow companies to unlock hidden value and increase shareholder value, while also focusing the operations of the companies to gain efficiency. Although demergers come with some cons, such as extra costs and cultural dissonance, if planned strategically they can lead to rewarding outcomes.
