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DE MERGER

WHAT IS A DE MERGER?

A de-merger is a corporate restructuring in which a business is broken into components, either to operate on their own, or to be sold or to be liquidated as a divestiture. A de-merger (or "demerger") allows a large company, such as a conglomerate, to split off its various brands or business units to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations.

TYPES OF DE MERGER

  • Congeneric/Product extension merger
    Such mergers happen between companies operating in the same market. The merger results in the addition of a new product to the existing product line of one company. As a result of the union, companies can access a larger customer base and increase their market share.
  • Conglomerate merger
    Conglomerate merger is a union of companies operating in unrelated activities. The union will take place only if it increases the wealth of the shareholders.
  • Market extension merger
    Companies operating in different markets, but selling the same products, combine in order to access a larger market and larger customer base.
  • Horizontal merger
    Companies operating in markets with fewer such businesses merge to gain a larger market. A horizontal merger is a type of consolidation of companies selling similar products or services. It results in the elimination of competition; hence, economies ofscale can be achieved.
  • Vertical merger
    A vertical merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge. Such mergers happen to increase synergies, supply chain control, and efficiency.

ADVANTAGES OF A MERGER

  • Increases market share
    When companies merge, the new company gains a larger market share and gets ahead in the competition.
  • Reduces the cost of operations
    Companies can achieve economies of scale, such as bulk buying of raw materials, which can result in cost reductions. The investments on assets are now spread out over a largeroutput, which leads to technical economies.
  • Avoids replication
    Some companies producing similar products may merge to avoid duplication and eliminate competition. It also results in reduced prices for the customers.
  • Expands business into new geographic areas
    A company seeking to expand its business in a certain geographical area may mergewith another similar company operating in the same area to get the business started.
  • Prevents closure of an unprofitable business
    Mergers can save a company from going bankrupt and also save many jobs.

DISADVANTAGES OF A MERGER

  • Raises prices of products or services
    A merger results in reduced competition and a larger market share. Thus, the newcompany can gain a monopoly and increase the prices of its products or services.
  • Creates gaps in communication
    The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees.
  • Creates unemployment
    In an aggressive merger, a company may opt to eliminate the underperforming assets ofthe other company. It may result in employees losing their jobs.
  • Prevents economies of scale
    In cases where there is little in common between the companies, it may be difficult to gain synergies. Also, a bigger company may be unable to motivate employees and achieve the same degree of control. Thus, the new company may not be able to achieve economies of scale.
 
     
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