Role of Social Media in The Silicon Valley Bank Run
Bank runs have been part of the banking industry for a long time. This is an unintended consequence of the fractional reserve banking system which is followed by the banking industry across the globe. Bank runs were common during the 1920s when the Great Depression took place. However, with the passage of time, the banking […]
The Stripe Business Model
Stripe is one of the most prominent start-ups in the world. It does not have the fame or popularity of other start-ups like Uber or Airbnb. However, Stripe has achieved an equivalent amount of success. In fact, as of early $2022, this start-up company was valued at $95 billion! This stupendous valuation makes it one […]
Herd Mentality Bias
Human beings are social animals. For centuries, our brains have been wired to conform to the actions of the larger group. This is because, in the old times, a person’s probability of survival would be negatively impacted if they were not in a group. This herding mentality may have helped our forefathers survive in the […]
Tax Co-operation: A Primer
The modern world is globalized. This means that free movement of goods, services, people as well as capital is allowed across the globe. This has important implications for governments. A globalized system means that tax systems can no longer work in a vacuum. The tax systems are continuously interacting with other tax systems, whether the […]
Cash Flow to Debt Ratio – Meaning, Formula, Assumptions and Interpretation
Formula Cash Flow to Debt Ratio = Operating Cash Flow/Total Debt Meaning The cash flow to debt ratio tells investors how much cash flow the company generated from its regular operating activities compared to the total debt it has. For instance if the ratio is 0.25, then the operating cash flow was one fourth of […]
Mergers and acquisitions are often used by conglomerates to create value. However, in some cases, demergers have also been effectively used. While the workings of mergers and acquisitions are well known to many people, demerger is still considered somewhat of a mystery.
In this article, we will have a closer look at what a demerger is and how it can be effectively used to generate value.
A demerger can be defined as the transfer of a company’s business undertakings to another company. The source company, i.e., the company whose undertakings are being transferred is called the demerged company. The other company is often known as the resulting company.
Demergers can be of more than one type. Some examples are given below:
For instance, company A used to operate in two lines of business viz. logistics and hospitality. If company A decides to separate all its logistics business in a separate entity, it would be called a spinoff. It needs to be noticed that both companies would exist as separate legal entities. Hence, A would still exist, and a new company B would also come into existence. The parent company would not be dissolved as a result of this separation of concerns.
For instance, if company A decides to create two new companies B and C to hive off its hospitality and logistics business respectively, such an arrangement would be called a split. It needs to be noticed that company A would not continue to exist in this case.
Firstly, spin-offs and splits do not constitute a sale to an external party. Hence, an equity carve-out results in the infusion of cash whereas spinoffs and splits do not.
Secondly, in this case, A remains the same legal entity. The carved out unit B becomes part of another company i.e. it does not remain an independent unit under the aegis of the parent company.
Some of the most obvious advantages of demerger have been listed below.
In order to conduct a demerger, the following steps need to be followed:
To sum it up, demergers are an effective corporate strategy. They can be used to unlock value as well as to streamline the operations of a firm.
Your email address will not be published. Required fields are marked *
