What is a Demerger?

Demergers are situations in which divisions or subsidiaries of parent companies are split off into their own independent corporations. The process for a demerger can vary slightly, depending on the reasons behind the implementation of the split. Generally, the parent company maintains some degree of financial interest in the newly formed corporation, although that interest may not be enough to maintain control of the functionality of the new corporate entity.

A demerger can be seen as the opposite of a merger. With a merger, the object is to take two separate business entities and combine them to form a new corporation that is able to accomplish more than the two former entities could ever accomplish on their own. The demerger still has the same ultimate goal. However, the thought is that by splitting off a portion of the existing company into a new and separate corporate entity, the chances for success and profitability are greater than if the company remained one unit.

It is not unusual for shareholders and key executives to maintain some involvement with both the parent and the newly formed company. For example, the two entities may have individuals who serve on the board of directors for both entities. It is also not unusual for the parent to retain some type of interest or investment in the new entity. If the stake held in the new company is considered to be a majority, then the new entity is more properly termed to be a subsidiary. However, if the investment in the new company is not a majority share, then the new business is properly referred to as a demerging entity or company.

There are many reasons why a company may undergo a demerger process. In some cases, the action may be necessary in order to comply with laws and regulations in place in a location where the company wishes to establish a presence. At other times, a division may have reached a point where it would become more profitable if it were to become an entity that is separate from the parent. The demerger may come about because the parent is changing direction and the division may be spun off as a way to continue meeting the needs of current clients while allowing the parent to focus on new markets. In all cases, the general idea behind the demerger is that the action will prove to be profitable for all parties concerned.