Spin-offs/demergers

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Spin-offs/demergers

This is where a new company is created and the shares in the new company are owned by the shareholders of the original company

There is no change in ownership of assets but the assets are transferred to the new company.

The result is to create two or more companies whereas previously there was only one company.

Each company now owns some of the assets of the original company and the shareholders own the same proportion of shares in the new company as in the original company.

An extreme form of spin-off is where the original company is split up into a number of separate companies and the original company broken up and it ceases to exist.

This is commonly called demerger.

Demerger involves splitting a company into two or more separate parts of roughly comparable size which are large enough to carry on independently after the split.

The main disadvantages of de-merger are:

  1. Economies of scale may be lost, where the de-merged parts of the business had operations in common to which economies of scale applied.

  2. The ability to raise extra finance, especially debt finance, to support new investments and expansion may be reduced.

  3. Vulnerability to takeovers may be increased.

  4. There will be lower revenue, profits and status than the group before the de- merger.

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