Demergers split divisions or subsidiaries of parent companies into independent companies. The parent company retains some financial interest but not control. Reasons for demergers include compliance, profitability, and changing direction.
Demergers are situations where divisions or subsidiaries of parent companies are split into their own independent companies. The process for an undeserving may vary slightly depending on the reasons behind implementing the split. Generally, the parent company retains some degree of financial interest in the newly formed company, although this interest may not be sufficient to retain control of the functionality of the new corporate entity.
A demerit can be seen as the opposite of a merger. With a merger, the objective is to take two separate business entities and combine them to form a new corporation capable of accomplishing more than the previous two entities could accomplish on their own. The gravedigger still has the same ultimate goal. However, the thinking is that by splitting a part of the existing company into a new, separate corporate entity, the chances of success and profitability are greater than if the company remained in one unit.
It is not uncommon for shareholders and key executives to retain some involvement with both the parent company and the newly formed company. For example, both entities may have individuals who serve on the board of directors of both entities. It is also not uncommon for the parent to retain some type of interest or investment in the new entity. If the interest in the new company is considered to be majority, the new entity will be more properly called a subsidiary. However, if the investment in the new company is not a majority interest, the new business is properly referred to as an entity or an emerging company.
There are many reasons why a company may go through a derecognition process. In some cases, action may be necessary to comply with applicable laws and regulations in a location where the company wishes to establish a presence. At other times, a division may have reached a point where it would become more profitable if it became a separate entity from the parent. The split may arise because the parents are changing direction and the division may be spun off as a way to continue serving the needs of current customers, allowing the parents to focus on new markets. In all cases, the general idea behind the split is that the action will prove to be profitable for all parties involved.
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