Demerger

Demerger Divestment
Strategy is not always about growth and diversification The strategic choice of a firm might be to reduce the sale of operations (downsizing) or disposal of parts of the organisation This involves the selling off part of the business or pulling out of certain product or market areas

Demerger_v1

Dr. Harald Fien

Demerger Internal and External

Internal divestment
Organic reduction or winding down The closure of a plant or division or the deletion of a product line as part of a strategy of rationalisation

External divestment
The sale of part of the business enterprise Divestment is the opposite of acquisition Demerger is the opposite of merger

Demerger_v1

Dr. Harald Fien

Demerger Finding the core

Business activities can be divided into: Peripheral activities:
Not essential to the core purpose of the business Are not a source of competitive advantage Are prime candidates for demerger

Supportive activities
Essential but not a core activity Failure in this area would cause serious damage to the business

Strategic activities
An actual or potential source of competitive advantage

Core activities
The central or core activity(ies) of the business What company is all about Should not be sold off or outsourced

Demerger_v1

Dr. Harald Fien

Demerger Types of buyers

Sphere of influence buyers:
Firms for which the acquisition would present horizontal or vertical integration

Related industry buyers:

Neither competitors nor upstream or downstream in the supply chain but a company in a related industry where skills are transferable and synergy exists

Management buy out (MBO)

Purchase by existing team of managers; usually funded by a venture capitalist

Management buy-in (MBI)

Where a business is acquired by a group of external investors and management team

Demerger_v1

Dr. Harald Fien

Demerger Advantages of divestment

Elimination of underperforming divisions Disposal of unwanted acquisitions Both the parent and the demerged company can focus on core activities Each business is able to respond independently to its own markets Smaller units are easier to control and co-ordinate As a result they have the potential to perform better Profits can be gained from selling off subsidiaries Provides an opportunity to raise finance for core activity

Demerger_v1

Dr. Harald Fien

Demerger Disadvantages of divestment

It involves disposal of assets Results in a reduction in asset base of the firm It might lead to in a loss of economies of scale And a loss of synergy

Demerger_v1

Dr. Harald Fien

Demerger Lessons Learned

Explain internal and external divestment. What are advantages of divestment? What are disadvantages of divestment?

Demerger_v1

Dr. Harald Fien