Demergers occur when a business sells one or more of the businesses it currently owns resulting in the business turning into a separate company.


Reasons for demergers:

  • Cultural differences – Differences within the two businesses cultures can cause demergers to occur. This is due to the fact that culture is the main aspect of how a business operates and therefore if the merged businesses cultures are incompatible with one another it can cause inefficiency and lack of integration. Therefore, it may be better for the business to demerge in order to improve business operations.
  • Reducing the risk of diseconomies of scale – By demerging it can reduce the risk of becoming too big too fast and therefore the negative aspects that are associated with this. For example, demerging can reduce the levels of the business hierarchy, thus making communication faster. As a result of this, efficiency within the business is likely to increase, reducing the business’s costs.
  • Increased focus – Mergers can often result in the business losing focus of its key aims and objectives. This is especially the case for conglomerate mergers, as it takes some of the business’s focus away from the market they’re in and shifts it towards a new one. Although this may be good for the business in terms of diversification, it can make it harder to become dominant in one market, as they are now shifting some of their resources towards a completely different market.
  • Remove loss making parts – A business may decide to demerge if some areas of the business are making much more profit than another part of the business which may be loss making. For example, after a conglomerate merger the business in the technological industry may be doing… Read more