Demergers split divisions or subsidiaries of parent companies into independent companies. The parent company retains some financial interest, but the new entity operates independently. Demergers can comply with laws, increase profitability, or allow the parent company to focus on new markets.
Demergers are situations in which divisions or subsidiaries of parent companies are split into their own independent companies. The process for a split may vary slightly, depending on the reasons behind implementing the split. In general, the parent company retains some degree of financial interest in the newly formed company, although that interest may not be sufficient to retain control of the new business entity’s functionality.
A split can be viewed as the opposite of a merger. With a merger, the goal is to take two separate business entities and combine them to form a new company that can accomplish more than the previous two entities could ever accomplish on their own. The split still has the same ultimate goal. However, the thinking is that by dividing a portion of the existing company into a new and separate business entity, the chances of success and profitability are greater than if the company remained a unit.
It is not unusual for shareholders and key management personnel to maintain some involvement with both the parent company and the newly incorporated company. For example, the two entities may have individuals who serve on the board of directors of both entities. It is also not unusual for the parent company to retain some type of interest or investment in the new entity. If the interest held in the new company is considered to be majority-owned, the new entity is more properly defined as a subsidiary. However, if the investment in the new company is not a majority stake, the new business is properly referred to as a dimerging entity or company.
There are many reasons why a company may go through a demerger process. In some cases, action may be required to comply with applicable laws and regulations in a location where the business wishes to establish a presence. Other times, a division may have reached a point where it would be more profitable if it were to become a separate entity from its parent company. The split may occur because the parent company is changing direction, and the split may be discarded as a way to continue serving current customer needs while allowing you to focus on new markets. In all cases, the general idea behind the split is that the action will prove profitable for all parties involved.
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