Demerger

A demerger is the opposite of an acquisition — a company spins off some business it owns into a completely separate company.

A demerger is usually carried out by distributing shares in the business to be spun off to shareholders of the company carrying out the demerger, in proportion to their shareholding in the original company.

Demergers can have beneficial effects on the quality of management as they allow the management of demerged companies to concentrate on their core business, they make companies easier for investors to analyse (by simplifying the business) and they often demonstrate a management focus on increasing shareholder value.

A demerger may be full, or partial. A partial demerger means that the parent company retains a stake (sometimes a majority stake) in the demerged business.

The motive for a partial demerger is sometimes to force the market to separately value the business that is demerged, in the expectation that this will lead to a higher sum of parts valuation of the parent company.