Demergers
Demergers
Courses Info
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Demerger – a business strategy in which a single business is broken into 2 or more components either to operate on their own to be sold or to be dissolved
Example of a demerger: Pepsi announced a demerger with Pizza Hut. Taco Bell is then to focus on competition with Coca Cola and was welcomed by shareholders as the restaurants had failed to live up to expectations
Reasons for demergers
- Lack of synergies – when different parts of the business fail to make each other more efficient. This can occur when managers are splitting their time between different business functions and could lead to diseconomies of scale. Firms could ‘demerge’ to avoid this from happening – as output increases the cost per unit increases
- To raise money from asset sales which could be used to pay shareholders or to reinvest in another part of business. A defensive tactic to avoid the attention of competition authorities who might be investigating market power
- Focusing on core businesses to cut costs and therefore improve profit margins & returns to shareholders.
- Reduce the risk of diseconomies of scales occurring by reducing the range of functions in a business to achieve lower management costs
Recent examples of de-mergers / planned de-mergers
- Pfizer selling their infant nutrition business to Nestle.
- Severn Trent Water demerged the waste management firm Biffa.
- PayPal splitting from eBay in 2014.
- Frasers Group (owner of Sports Direct and Evans Cycles) selling their Dunlop brand.
- Prudential demerging their M&G Investment Fund business
- Walmart, the US-based retail giant, stated an aim to sell a majority stake in Asda following the UK competition regulators’ decision in 2019 to block a proposed merger with rival Sainsburys. This happened in October 2020.
- Travis Perkins de-merging their Wickes brand
Impact of demergers
- Workers – increased job security if the parts of the business which made a loss are demerged as this allows for the profit-making functions of the business to flourish
eg, job losses, promotions - Consumers – low prices due to competition. Businesses can focus on meeting consumer demands. However, there may be limited services available
- Businesses – reduce diseconomies of scale and become more efficient. They also experience increased profits by raising funds from selling parts of the business or getting rid of the services which caused a loss and are able to focus on core business
Quick Fire Quiz – Knowledge Check
- Define ‘Demerger’ (2 marks)Oligopoly – The Tutor Academy
- Identify and explain two examples of a demerger (4 marks)
- Identify and explain four reasons why a demeger may occur (8 marks)
- Analyse the impact of demergers from a business, consumers, and workers perspective (8 marks)
Next Revision Topics
A Level Economics Past Papers
