What Is a De-Merger?
A de-merger is a corporate restructuring in which a business is broken into components, either to operate on their own, or to be sold or to be liquidated as a divestiture. A de-merger (or "demerger") allows a large company, such as a conglomerate, to split off its various brands or business units to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations.
- A de-merger is when a company splits off one or more divisions to operate independently or be sold off.
- A de-merger may take place for several reasons, including focusing on a company's core operations and spinning off less relevant business units, to raise capital, or to discourage a hostile takeover.
- The most common type of de-merger, the spin-off, results in the parent company retaining an equity stake in the new company.
De-mergers are a valuable strategy for companies that want to refocus on their most profitable units, reduce risk, and create greater shareholder value. Analysts tend to discount parent companies that hold multiple subsidiaries by roughly 15-30% due to less than transparent capital allocation. De-merging also affords companies the ability to have specialists manage specific business units or brands rather than generalists. It is also a good strategy for separating out business units that are underperforming and creating a drag on overall company performance. De-mergers can create some complicated accounting issues but can be used to create tax benefits or other efficiencies. Government intervention, such as to break up a monopoly, can spur a de-merger.
Individually, de-mergers can happen for a variety of reasons, one of them being that management knows something that the market is unaware of and wants to address an issue before it finds out. This is evident in that corporate insiders tend to profit from de-mergers.
One of the most common ways for a de-merger to be executed is a "spinoff," in which a parent company receives an equity stake in a new company equal to their loss of equity in the original company. 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.
In 2001 British Telecom conducted a de-merger of its mobile phone operations, BT Wireless, in an attempt to boost the performance of its stock. British Telecom took this action because it was struggling under high debt levels from the wireless venture.
Dr. Pepper Snapple Group, Inc. was created in 2008 when Cadbury Schweppes spun off its U.S. beverages unit.
Australian airline Qantas split its international and domestic operations via demerger in 2014. Each unit is run separately.
A common de-merger scenario would see a utility separate its business into two components: one to manage its infrastructure assets and another to manage the delivery of energy to consumers. Spin-offs were very popular in 2014, with nearly 50 occurring in the United States alone, many of them in the utility and solar power sectors.