3.1.3

• Reasons for demergers

  Some of the key motivations for demergers include:

  • Focusing on core business to cut costs and therefore improve profit margins and returns to shareholders
  • Reduce the risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, to achieve lower management costs
  • Raise money from asset sales and return it to shareholders
  • A defensive tactic to avoid the attention of competition authorities who might be investigating market power
• Demergers

  Demergers occur when a firm decided to split into separate firms
• Examples of demergers

  Pfizer selling their infant nutrition business to Nestle

  PayPal splitting from eBay in 2014

  PepsiCo demerged their food/ drinks business by creating 'Yum Brands' (it owns KFC, Pizza Hut and Taco Bell)
• Impact of demergers on businesses, workers and consumers

  Business - long term gain of higher returns, short term cost of selling off a part of their business

  Workers - expected job losses if demerger is driven by a desire to control costs - although new jobs might be created, opportunities for managers of newly demerged businesses

  Consumers - impact on prices depends on scale of competition