3.1.3

• Demerger is when a single business is broken into two or more components either to operate on their own, to be sold, or to be dissolved
• Reasons for demergers: lack of synergies, value of share price, focused companies, avoid attention from competition authorities
• lack of synergies - different parts of firm have no positive impacts on each other - not helping other part to be more profitable or efficient
• a lack of synergy means that senior management are splitting their time between areas which are so different it could lead to diseconomies of scale - higher production costs
• some firms demerge because the value of the demerged firm is worth more than the single larger firm
• overall value of a firm decreases because of the lack of success and lack of potential to grow (leads to lower share price)
• financial markets split up firms to ‘create value’
• if company is more focussed on individual markets, they become more efficient - leads to higher profits
• management have limited time and skills to make all parts of business successful. Focussing on one area can improve their skills and become more efficient
• firms may choose to demerge in order to avoid attention from competition authorities
• competition authorities (e.g. CMA) prevent firms from gaining excessive power, monopoly prices being set above the marginal cost and consumer choice being lowered
• demergers means more managers are requires so workers can get promoted
• demergers also lead to job losses if the firm becomes more efficient after demerging
• concentrating on a smaller business leads to more efficiency.
• concentrating on a smaller business can lead to more innovative products and so can survive high competition
• a smaller business could lead to a loss of economies of scale - reduce efficiency - which leads to a fall in profits
• If demerged firms become more efficient, they can cut costs and offer cheaper prices for consumers
• if demerged firms invest more in innovation, consumers benefit from new and better products
• if demerged firms become motivated on profit maximisation, they will raise prices or reduce their product range