ILO:
a) Reasons for demergers
b) Impact of demergers on businesses, workers and consumers
a) Reasons for demergers
b) Impact of demergers on businesses, workers and consumers
Demerger
Consider the following article from the BBC. Why would a business want to demerge?
About 97% of mergers by UK companies fail to completely fulfil their strategic objectives a report suggests.
The culture shock caused by bringing together two organisations is the biggest reason for failure, according to management consultancy Hay Group. It said that the UK's record was among the worst in Europe where the overall failure rate was 91%. The report, which analysed more than 200 major European mergers and acquisitions found that about 28% of business leaders who had been involved said that the deal had failed to create "significant new value".
Hay said that when carrying out due diligence ahead of a merger, many firms prioritised finance and systems over more intangible assets such as business structures, staffing and corporate governance. About 54% of business leaders said that not properly auditing such non-financial assets increased the risk of making a wrong acquisition "Integrating intangible assets six months after a deal has gone live is too late," said David Derian, a director at the Hay Group. "Companies should be examining the compatibility and differences between the two firms well before the deal is made public in order to have a clear plan of action in place right from the start."
But about 70% of senior management believe that it is too difficult to get information on a firm's business culture, staff and organisational structures before they make a bid, the report said. It added that after a deal is completed, only 13% of mangers put a high priority on engaging and integrating executives and the workforce as a whole.
The report suggested this had a "disastrous impact" on the successful integration of firms with 78% of employees at a company being bought opposing the mergers. The atmosphere at work after a merger was also unsatisfactory many managers said, with 22% of those quizzed talking of a culture shock and 16% describing the situation as "trench warfare".
http://news.bbc.co.uk/1/hi/business/7104298.stm
The culture shock caused by bringing together two organisations is the biggest reason for failure, according to management consultancy Hay Group. It said that the UK's record was among the worst in Europe where the overall failure rate was 91%. The report, which analysed more than 200 major European mergers and acquisitions found that about 28% of business leaders who had been involved said that the deal had failed to create "significant new value".
Hay said that when carrying out due diligence ahead of a merger, many firms prioritised finance and systems over more intangible assets such as business structures, staffing and corporate governance. About 54% of business leaders said that not properly auditing such non-financial assets increased the risk of making a wrong acquisition "Integrating intangible assets six months after a deal has gone live is too late," said David Derian, a director at the Hay Group. "Companies should be examining the compatibility and differences between the two firms well before the deal is made public in order to have a clear plan of action in place right from the start."
But about 70% of senior management believe that it is too difficult to get information on a firm's business culture, staff and organisational structures before they make a bid, the report said. It added that after a deal is completed, only 13% of mangers put a high priority on engaging and integrating executives and the workforce as a whole.
The report suggested this had a "disastrous impact" on the successful integration of firms with 78% of employees at a company being bought opposing the mergers. The atmosphere at work after a merger was also unsatisfactory many managers said, with 22% of those quizzed talking of a culture shock and 16% describing the situation as "trench warfare".
http://news.bbc.co.uk/1/hi/business/7104298.stm
Demerger theory
A demerger is when a business sells off one or more of the businesses that it
owns into a separate company.
Reasons for demergers include:
> Cultural differences
> Creating more focused firms
> Protecting the value of the firm
> Reducing the risk of diseconomies of scale
> Raising money from asset sales and return to shareholders
> To meet requirements of competition authority regulators
Activity: see theory sheet
Additional reading: Tutor2u
Reasons for demergers include:
> Cultural differences
> Creating more focused firms
> Protecting the value of the firm
> Reducing the risk of diseconomies of scale
> Raising money from asset sales and return to shareholders
> To meet requirements of competition authority regulators
Activity: see theory sheet
Additional reading: Tutor2u
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Research examples of failed M&A.
Why many takeovers fail - revision video
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Watch the theory video on demergers.
Business Demergers | 2020 Update | A-Level Economics
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Impact on businesses, workers & consumers
- Businesses – allowing focus on the core business, raising funds from selling part of the business, removing loss-making parts of the business
- workers – increase job security if loss-making parts of the business are demerged, reduced conflict between cultures, increased focus on the business to enable it to be more profitable
- consumers – greater competition leads to lower prices, more focused businesses are able to better meet consumer needs.
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Explain the benefit of separating the Yum brand with Yum china for the business? (5 marks)
Yum Brands' Big Split From China | Squawk Box | CNBC
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Assess the impact on ASDA workers and consumers after Walmart sells the business? (10 marks)
Walmart sells UK's Asda supermarkets for $8.8 billion
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Independent research activity:
Research where the CMA have forced an industry/business to sell off or demerge parts of its business. What was the economic argument behind their judgement? Use your economic toolkit to illustrate the impact of the intervention.
Research where the CMA have forced an industry/business to sell off or demerge parts of its business. What was the economic argument behind their judgement? Use your economic toolkit to illustrate the impact of the intervention.