Merger: Definition, How It Works With Types and Examples

what is demerger

The rationale is that the newly formed entity becomes more profitable as a standalone company. If the company is public, new shares are created and issued to shareholders of the parent company. A demerger is a type of corporate restructuring in which a company splits into two or more separate entities. This separates the company’s operations, assets, and liabilities into two distinct businesses. This type of merger occurs between companies that sell the same products but compete in different markets.

This type combines two or more companies operating in the same market or sector with overlapping factors, such as technology, marketing, production processes, and research and development (R&D). A product extension merger is achieved when a new product line from one company is added to an existing product line of the other company. When two companies become one under a product extension, they can gain access to a larger group of consumers and, thus, a larger market share. An example of a congeneric merger is Citigroup’s 1998 union with Travelers Insurance, two companies with complementing products. A merger is an agreement that unites two existing companies into one new company.

  1. So, logic suggests the value of the parent company should be a simple sum of the values of all these businesses.
  2. One such company which has subsidiaries in oil and gas, retail and telecom is Reliance Industries.
  3. When a company has businesses that are not performing well, demerging them can help to improve the overall performance of the company.
  4. The source company, i.e., the company whose undertakings are being transferred is called the demerged company.

Another key point to consider is that any drop in the parent company’s stock may be made up by the positive performance of the new company’s stock. As the name implies, a liquidation de-merger involves liquidating the business unit in question. At that point, shares are bought and sold independently, and investors have the option of buying shares of the unit they believe will be the most profitable. A partial de-merger is when the parent company retains a partial stake in a de-merged company. French oil company Total demerged its refining and marketing businesses into a separate company, known as Total Refining & Marketing.

A demerger can lead to increased efficiency as the parent company can focus on its core business and the resulting companies can focus on their businesses. A special-purpose acquisition company (SPAC) merger generally occurs when a publicly traded SPAC uses the public markets to raise capital to buy an operating company. The operating company merges with an SPAC and becomes a publicly-listed company. One of the most common—and the most notable advantages—is that it boosts shareholder value. Investors receive shares in the new company and certainly reap the financial benefits if and when the new entity becomes profitable.

How Demergers Actually Work

When an existing company is split into two or more companies and all the companies are independent after the demerger, it is called a split-up. They could have instead bought the shares of that dominant company. As a result, they are willing to pay a lower rate than the conglomerate’s true value. Moreover, investors can also find it hard to understand the company’s business model because of the large structure. In short, more often than not, transparency gets compromised in a conglomerate structure. You know that many companies conduct business across different industries.

The hope is that this type of restructuring boosts shareholder value and allows management to focus on the new company’s profitability. It occurs when multiple businesses are split from the parent company into different entities. If the company is public, shareholders of the parent company are given the option of trading in their shares of the parent company to those of the newly created entity(s). The demerger is when the company shareholders carrying out corporate finance split the business into two or smaller companies.

Management changes

In a complete demerger, the company is split into two or more completely independent companies. De-merging also allows companies to separate underperforming business units that create a drag on their overall performance. Although they can create some complicated accounting issues, de-mergers can create tax benefits or other efficiencies. Government intervention, such as to break up a monopoly, can spur a de-merger.

Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about. A demerger may also require regulatory approval, which can be time-consuming and expensive.

what is demerger

There are several types of mergers and reasons companies complete mergers. Mergers and acquisitions (M&A) are commonly done to expand a company’s reach, expand into new segments, or gain market share. Often, during a merger, companies have a no-shop clause to prevent purchases or mergers by additional companies. After a merger, shares of the new company are distributed to existing shareholders of both original businesses. In a spinoff, a (parent) company creates a brand new company from one of its business units.

What Is a Horizontal Merger?

One such company which has subsidiaries in oil and gas, retail and telecom is Reliance Industries. Now, each of these subsidiary businesses has a different value because of their different profits, barabar? So, logic suggests the value of the parent company should be a simple sum of the values of all these businesses. It’s a combination of factors, from financial strategies to internal reorganisation and even external influences, that drive companies to go through the demerger process. The largest mergers in history have totaled over $100 billion each.

Key Takeaways

A demerger can also lead to increased shareholder value as the shareholders of the parent company will get shares in the resulting companies. One of the primary reasons for demerging is to enable the parent company to focus on its core business. When a company has many non-core businesses, it may want to demerge them so that it can focus on its main operations. De-mergers are a smart approach for businesses seeking to refocus on their most profitable units. Those parent companies that hold many subsidiaries get discounts from analysts that could be 15-30%. Mergers occur when two or more companies combine to make one larger one.

A demerger can cause short-term disruption as the businesses are separated and each company is responsible for its own operations. The transfer of a company’s business activities to separate legal entities is known as a demerger. The demerged firm, which is the source company, is referred to as the demerged company.

Tax implications

As we were engrossed in the news, my father and I began discussing the future business prospects, exchanging our views. Meanwhile, my younger sister, curious about our conversation, interrupted us to ask the meaning of “demerger”. A reverse merger, also known as a reverse takeover (RTO), is when a private company purchases a publicly traded company. For instance, the New York Stock Exchange (NYSE) completed a reverse merger with Archipelago Holdings in 2006. Natalya Yashina is a CPA, DASM with over 12 years of experience in accounting including public accounting, financial reporting, and accounting policies. Shareholders must approve of the move to restructure the company.

Sakshi is an adventurous spirit who enjoys both the intellectual stimulation of Finance and the sensory experiences of good food and nature’s beauty. She has a passion for delving into complex financial topics and distilling them down into easy-to-understand insights. When she’s not poring over financial reports, you might find her exploring a new corner of the city, trying out new restaurants and cuisines or admiring the beauty of the night sky. Being a finance student, I found it challenging to break down the concept in a way that she would easily grasp. 🥲 But then, my father, in his own unique way, attempted to explain by asking my sister to imagine her favourite cake.

Latest Posts

Free Moving Estimate

    Get in Touch