Demerger: Meaning, Benefits, Types, Examples

What is a demerger?

A demerger, sometimes written de-merger, is when a company is divided up into its constituent parts. The opposite of a merger, a demerger usually happens for the purpose of selling or liquidating a business unit, or empowering it to operate on its own as a separate legal entity. It sounds similar to a company divestiture or deacquisition – and indeed some demergers are divestments – however there is more than one type of demerger, which we’ll cover below. But first let’s look at reasons to demerge.

Reasons for demerging

Focus on core competencies

A company may decide to demerge in order to focus on its core competencies and streamline its operations. By separating non-core businesses or divisions, the company can allocate more resources and attention to its primary areas of expertise.

Unlock shareholder value

Demergers can often unlock shareholder value by creating separate entities that are more attractive to investors. This can result in higher stock prices for the newly created entities, leading to increased shareholder value.

Enhance strategic flexibility

Demergers can provide greater strategic flexibility. Each separate entity can pursue its own unique strategic goals, target markets, and growth opportunities without being constrained by the broader organization's strategic direction.

Improve financial performance

A demerger can help improve the financial performance of both the parent company and the newly created entities. By shedding underperforming or non-core assets, the parent company can improve its financial ratios and profitability.

Reduce complexity

Large conglomerates with diverse business interests may choose to demerge to simplify their corporate structure. This can lead to more efficient management and decision-making processes.

Regulatory compliance

Changes in regulatory requirements or antitrust concerns may force a company to demerge in order to comply with competition laws or regulations that prohibit excessive market concentration.

Strategic alliances or partnerships

A company may pursue a demerger to facilitate strategic alliances or partnerships with other companies. Separate entities can enter into partnerships, joint ventures, or collaborations that are better aligned with their respective businesses.

Tax efficiency

Demergers can sometimes be structured to achieve tax efficiencies. The separation of entities may lead to tax benefits or optimizations that can enhance overall financial performance.

Investor demand

If investors express a preference for a particular business unit or division of a company, a demerger can be a response to meet that demand. This allows investors to have a more direct and focused investment in the businesses they are interested in.

Risk mitigation

In some cases, a company may demerge to reduce its exposure to risks associated with certain business units. Separating risky or volatile assets from the core business can help protect the overall financial health of the company.

Types of demerger

1. Spin-offs

In a company spin-off, the parent company separates off a business unit and makes it its own entity. Shares in the newly created company are distributed to existing shareholders of the parent via a dividend. In a spin-off transaction, the parent can, if it wishes, retain an interest in the spun-off company (as long as it is no more than 20%) but no funds are raised as no stock is sold. 

2. Splits

Split-off

A large company consisting of multiple businesses may want to demerge them into separate companies. In a split-off, the shareholders are given the opportunity to exchange their ParentCo shares for new shares of the subsidiary (SplitCo). This “tender offer” often includes a premium to encourage existing ParentCo shareholders to accept the offer. 

Split-up

In contrast to the above, in a split-up the parent company does not survive. It is liquidated into the new companies that are created as part of the transaction. 

3. Carve-outs

Spin-offs and split-offs can be preceded by an IPO in which a portion of the share of the subsidiary is sold to the public, with the proceeds either retained by the subsidiary or distributed to the parent. This is called an equity carve-out.

The significant difference with this type of demerger is that it results in an injection of cash whereas spin-offs and splits do not.

In reality, more than one type of demerger is often executed simultaneously. For example, an equity carve-out is typically executed ahead of a split-off to establish a public market valuation for the subsidiary’s stock.

Demerger advantages and disadvantages

All three types of demerger can benefit from the same following things: enhanced shareholder value, tax benefits, and improved profitability. 

See also: The Benefits of Demergers & Divestments

There are also some specific advantages and disadvantages depending on the type:

Spin off advantages

• The parent company can retain a non-controlling interest in the subsidiary.

• Existing shareholders enjoy the benefit of holding shares in two companies instead of  one. 

• Can be a non-taxable event.

• Removal of the parent company from the management and decision-making of the subsidiary.

Spin off disadvantages

• No funds are raised as no stock is sold.

• Possibility of shareholder churn if shareholders were against the spin-off decision.

• The price of the shares of the parent company declines by the market value of the spun-off business.

Split advantages

• A split-off is a tax-efficient way for ParentCo to redeem shares.

Split disadvantages

• Potential for shareholder lawsuits if the premium offered by ParentCo is deemed unfair by activist shareholders. 

• No funds are raised as no stock is sold.

Carve-out advantages

• Raising capital while holding control proves a win-win situation.

• Opportunity to sell a non-core business unit.

• Allows the parent company to get an evaluation of the subsidiary's market value.

• Prevents subsidiary from being purchased by a competitor

Carve-out disadvantages

• Parent company can offer up to 20% only of its shares in an IPO to obtain tax benefit.

Demerger examples 

GSK

On Monday 18 July 2022, GSK plc (“GSK” or the “Company”) separated its Consumer Healthcare business from the GSK Group in a spin-off to form Haleon plc (“Haleon”), an independent listed company. 

Paypal

When PayPal split from eBay in a spin-off transaction, eBay shareholders received one share of PayPal for each share of eBay that they owned. 

GE

A notable split-off example is Synchrony Financial (SYF) from its parent General Electric (GE). GE offered existing shareholders the opportunity to exchange each share of GE stock for 1.0505 shares of newly formed Synchrony stock.

United Technologies

On November 26, 2018, United Technologies announced its split-up into three separate companies: United Technologies, Otis Elevator Company, and Carrier. While the United Technologies name continued, the newly created company (UTC) was an entirely new entity from the parent (UTX). 

American Express

An example of an equity carve-out transaction is American Express in 1987 when it sold 39% of Shearson Lemon.