Demerger is the act of splitting off a part of an existing company to become a new company, which operates completely separate from the original company.
- Shareholders are usually given an equivalent stake in the new company
- Reasons: Internal or external factors
- Spin-Off: A type of demerger, division of a company into wholly owned subsidiary of parent company.
- Eg: Kotak Mahindra Finance Ltd formed Kotak Mahindra Capital Corporation (investment banking division)
- Eg: Sun Pharma formed Sun Pharma Advanced Research Company Ltd.
Main motivations for demerger
- Focussing on core business
- Reduce the risks of diseconomies of scale and diseconomies of scope by reducing the range of function in a business, lower management costs.
- A defensive tactic to avoid attention of the competitors.