Demergers (Edexcel A Level Economics A)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Reasons for Demergers
A demerger occurs when a firm sells off at least one of the businesses it owns, or splits itself into separate parts to create two or more firms
Reasons For Demergers
Reducing diseconomies of scale | Increased business focus | Cultural differences |
|---|---|---|
Decreasing the size of the firm can reduce the diseconomies and lower the cost/unit which increases the profitability | If efforts and resources are scattered across a large number of firms/ industries it can be hard to maintain focus and profitability. Narrowing the focus can improve profitability | The most common reason for failures of mergers is cultural differences. Sometimes these differences are irreconcilable and not worth the expense to change |
Remove loss making divisions | Increase liquidity and dividend payments | Comply with the demands of the competition commission |
It can be more profitable to remove loss-making divisions and replace them with outsourcing | Demergers generate extra revenue for the firm in the year they occur. This may increase the profit and dividend payments | Sometimes firms are forced to demerge by the competition regulator due to concerns about the high level of market share they may have, which is considered to be anti-competitive and bad for consumers |
Impacts of Demergers on Stakeholders
The impacts on the firm conducting the demerger should be mostly positive and include
Opportunity for a more narrow focus on the core business
Removing loss-making portions of the business
Increased efficiency and lower costs/unit
Increasing the annual profits for the year that the demerger occurred
Removing some difficult cultural differences
The impacts on employees include
Some workers may lose their jobs
Reduced friction from cultural differences can help build better team dynamics
Smaller workforce provides more opportunity for promotion
Less complication in daily tasks due to more narrow focus
The impacts on consumers include
If successful, better quality products and customer service
If successful, lower prices due to the firms new efficiencies
If unsuccessful, a narrower product range and perhaps worse quality/customer service
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