Business De-mergers

• What is a de-merger?


  When a firm decides to split into separate firms.
• What are the key motivations for a de-merger?

  1. FOCUSING ON CORE BUSINESSES to cut costs & therefore improve profit margins & returns to shareholders.
  2. REDUCE THE RISK OF DISECONOMIES OF SCALE and DISECONOMIES OF SCOPE by reducing the range of functions in a business and thereby achieve lower management costs.
  3. RAISE MONEY ASSET SALES and return it to shareholders who have equity in the business.
  4. a DEFENSIVE TACTIC to avoid the attention of competition authorities who might be investigating market power.
• What are recent examples of de-mergers/planned de-mergers?

  • PayPal splitting from eBay in 2014
  • Walmart, the US-based retail giant, stated an aim to sell at majority stake in Asda following the UK competition regulators‘ decision in 2019 to block a proposed merger with rival Sainsbury‘s. This happened in October 2020.
• What is the impact of de-mergers on businesses?

  • Long-term —> higher returns/operating profits
  • But short-term cost of selling off a part of their business.
• What is the impact of de-mergers on employees?


  • Expected job losses if de-merger is driven by a desire to control unit costs - although new jobs might be created e.g. arising from a successful management buy-out of a de-merged business.
  • Opportunities for managers of newly de-merged business.
• What is the impact of de-mergers on consumers?

  • Impact on prices depends on the effect of a de-merger on the intensity of industry competitor.
• Why is focusing on core competencies a reason why a business may decide to implement a de-merger?


  A company may decide to de-merge a business unit that is not a core part of its operations in order to focus on its core competencies. By separating the non-core business into a separate entity, the business can improve its focus and resources on its main business.
• Why is unlocking value a reason why a business may decide to implement a de-merger?


  A company may de-merge a business unit in order to unlock its value and create separate entities that are worth more than the combined business. This can help to increase shareholder value and improve overall financial performance.
• Why is regulatory requirements a reason why a business may decide to implement a de-merger?


  A company may decide to de-merge a business unit to comply with regulatory requirements. This can be the case in industries where there are strict rules around ownership and control of certain types of businesses.
• Why is strategic restructuring a reason why a business may decide to implement a de-merger?


  A company may decide to de-merge a business unit as part of a broader strategic restructuring effort. This can involve separating underperforming businesses or restructuring the company‘s portfolio of businesses in order to create a more streamlined and efficient organisation.
• Why is faster speed of access to new product or market areas a reason why a business might merge instead of growing internally?

  Rather than growing into a market, they can take over exsiting firms.
• Why is increased market share a reason why a business might merge instead of growing internally?

  Increased market power.
• Why is accessing economies of scale a reason why a business might merge instead of growing internally?

  (perhaps by combining production capacity) - more explained later in the course.
• Why is securing better distribution channels a reason why a business might merge instead of growing internally?

  Control of supplies by merging with your suppliers.
• Why is overcoming barriers to entry to target new markets a reason why a business may merge instead of growing internally?

  Cultural barriers etc can be overcome if you merge with an existing brand.
• Why do mergers/takeovers fail (1)?

  1. Huge FINANCIAL COSTS OF FUNDING TAKEOVERS including deals that have relied on loan finance.
  2. INTEGRATING SYSTEMS - Companies may have very different technology systems that are expensive or impossible to marry. e.g. eBay and Skype.
  3. SHARE PRICE: Might have a negative impact on a company’s share price.
• Why do mergers/takeovers fail (2)?

  4. CLASHES OF CORPORATE CULTURES, priorities and key personalities.

  5. The enlarged business may SUFFER A LOSS OF CUSTOMERS and also some of their most skilled workers post acquisition (a LOSS OF HUMAN CAPITAL)

  6. PAYING TOO MUCH: With the benefit of hindsight we can see the ‘winners curse’ - i.e. companies paying over the odds to take control of a business - this is particularly the case with takeovers driven by management ego.
• Wha are the reasons for de-mergers?

  • Focusing on CORE BUSINESSES to streamline costs and improve profit margins (specialise).
  • Reduce the RISK OF DISECONOMIES OF SCALE and DISECONOMIES OF SCOPE by reducing the range of functions in a business, lower management costs.
  • A DEFENSIVE TACTIC to avoid the attention of competition authorities who might be investigating possible monopoly power in an industry/market.
  • To AVOID LOSING THEIR BRAND POWER - especially if the other firm has a bad reputation.
  • RAISE MONEY FROM ASSETS SALES and return to shareholders.