Business De-mergers

This study note looks at the economics of de-mergers. A de-merger is when a firm decides to split into separate firms

What are some of the main motivations for a business de-merger?

Some of the key motivations for de-merger include:

1. Focusing on core businesses to cut costs and 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 from 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.

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 on businesses, workers and consumers

• Businesses:
  • Long term – higher returns / operating profits.
  • But short-term cost of selling off a part of their business.
• Employees:
  • Expected job losses if demerger 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 demerged business.
  • Opportunities for managers of newly demerged business.
• Consumers:
  • Impact on prices depends on the effect of a demerger on the intensity of industry competition.

Why many takeovers fail - revision video

A de-merger is a corporate strategy in which a company separates one or more of its business units into separate, independent entities. Here are four reasons why a business may decide to implement a de-merger, along with real-world examples:

1. Focus on core competencies: 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 company can improve its focus and resources on its main business. For example, in 2019, Dow Inc. spun off its non-core businesses into a separate entity called DowDuPont.
2. Unlock value: 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. For example, in 2012, Kraft Foods de-merged its North American grocery business into a separate entity called Kraft Foods Group in order to unlock value for shareholders.
3. Regulatory requirements: 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. For example, in 2017, Barclays Bank de-merged its African banking unit to comply with new regulations that required foreign banks to reduce their holdings in African subsidiaries.
4. Strategic restructuring: A company may 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 organization. For example, in 2015, eBay de-merged its PayPal payments business into a separate entity in order to focus on its core e-commerce business.

These are just a few examples of why a business may decide to implement a de-merger. By separating business units into separate entities, companies can focus on core competencies, unlock value, comply with regulatory requirements, or undertake broader strategic restructuring efforts.

Four examples of recent de-mergers that have occurred in different countries:

1. Unilever - In 2018, Unilever announced that it would be de-merging its spreads business, which included brands such as Flora and I Can't Believe It's Not Butter. This was done in order to focus more on its core business of personal care and household products. The de-merger resulted in the creation of a separate company called Upfield Holdings.
2. Siemens - In 2019, Siemens announced that it would be de-merging its energy business, which included its gas and power division. The de-merger was done in order to allow the energy business to have more independence and flexibility in the changing energy market. The new company created as a result of the de-merger is called Siemens Energy.
3. BT Group - In 2019, BT Group announced that it would be de-merging its Openreach division, which is responsible for the UK's broadband infrastructure. This was done in order to address concerns about competition in the broadband market. Openreach is now a legally separate company, although it remains part of the BT Group.
4. Kraft Heinz - In 2021, Kraft Heinz announced that it would be de-merging its cheese business, which includes brands such as Philadelphia cream cheese and Cheez Whiz. The de-merger is expected to allow the two businesses (the remaining Kraft Heinz business and the new cheese business) to focus more on their respective markets and customer needs. The new cheese business will be called The Kraft Heinz Company.