A demerger is the restructuring of a corporation to create two separate companies that can operate independently.

Companies do this for many strategic reasons. A demerger can:

  1. Create stock market value
  2. Assist or prevent acquisition
  3. Refocus on profitable products
  4. They can raise capital for the corporation
  5. Separate a conglomerate into individual brands
  6. Create separate legal entities for different operations
  7. Detach parts of the corporation that have gone into liquidation
  8. Sell off parts of the conglomerate that are not performing as well

How Does A Company De-merge?

A company may separate in more than one way depending on its circumstances and what it wants from the demerger.

Spin-off

In a spin-off, the parent moves one aspect of its business to a separate entity. This would not erase the parent company, rather it separates the business aspects and allows the two companies to operate independently of each other.

Split

Another way a company might decide to demerge is by splitting itself. In a split, the conglomerate decides to break up all its business into individual companies, so that in the end the original company does not exist.

Equity Carve-Out

An equity carve-out is where the parent company sells off a part of the demerged or subsidiary business. Corporations will usually do this with parts of the business that are not part of its core operations. The parent, or demerged, company holds an interest in the resulting company, usually equal to the value of the loss that resulted from the demerger. Unlike a spin-off or split, equity carve-out allows a business to make money off the subsidiary company.

The Advantages

A demerger allows a business to refocus itself onto the products that are creating the most revenue while cutting out the businesses that are lowering the overall performance of the conglomerate.

Some of the main advantages are that it:

  • Can create tax benefits
  • Lowers management costs
  • Business can invest more in building the brand
  • The parent company can make significant profits
  • Allows the business greater control over its core operations
  • Helps improve competition in the market as a result of splitting up market power
  • Increases the share value of the parent company because it becomes more transparent.
  • Allows both businesses to grow without overshadowing or competing with the other.
  • Acts as damage control for businesses when one aspect of the business comes under fire.
  • Allows for better management of the company as each individual company is responsible for its finances.

The Disadvantages  

  • It allows business insiders to make massive profits
  • It may suggest that the conglomerate is looking to hide something from the market
  • Demergers can be complicated and time-consuming, especially from an accounting perspective.
  • They can also be used to evade tax, often by paying a premium to the resulting company, which can raise concern for Tax Authorities.

Final Thoughts

Demergers are a useful way to help business streamline its processes, cut costs and focus on improving its brand. As a result, it helps the corporation run smoother by cutting out parts of the business that are underperforming. It also allows the secondary business to grow without having to compete with the core products or services.

Demergers also create revenue for the business and increase market value by allowing it to be more transparent.

If you are looking to improve your business operation, or think certain parts of your business are not performing as well as other, demerging your business may be right for you. A mergers and acquisitions lawyer will be able to assist you with the process.

Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Naga Vamaraju

Naga Vamaraju is a legal intern at LawPath as a part of the Content Writing team. She is in her final year of a Bachelor of Arts (Psychology) and Bachelor of Law Degree. She has a particular interest in the law surrounding starting and operating a business.