A demerger is a special kind of business deal. It’s when a company takes part of itself and makes it into a separate company. Then, the original company sells this new separate company. Or they might decide to take the new company public on the stock market.

Why do Companies do Demergers?

There are a couple main reasons why a company might want to do a demerger:

The Business Isn’t a Good Fit Anymore

Sometimes, a company has a part of its business that just doesn’t fit well with the rest anymore. Maybe that part isn’t making money like they hoped. Or maybe it doesn’t match the company’s main goals and plans for the future.

In cases like this, the company might decide it’s better to get rid of that mismatched business entirely. They take that part of the company and split it off into its own separate thing. Then, they can sell it to someone else who wants it.

They Need to Raise Money

Another reason a company might do a demerger is because they need to raise some cash. Maybe they have big plans to grow the main part of their business. But to do that, they need more money to invest.

One way to get that money is by taking part in the company and turning it into a separate business. Then, they can sell shares of this new company to investors on the stock market. This brings in a bunch of new money that the original company can use.

How do Demergers Work?

Here’s a quick step-by-step of how a demerger usually goes:

1. First, the company decides which part of its business it wants to split off.
2. Then, they take that part and set it up as a separate company. This new company gets its own name and its own management team.
3. Next, they figure out how to divide up the ownership of this new company. Usually, the shareholders of the original company get a certain number of shares in the new company.
4. After that, the new company is ready to go off on its own. The original company might sell it to another company entirely. Or they might “spin it off” by selling shares to investors on the stock market.

There are a lot of legal and financial details to work out along the way. But that’s the basic idea of how a demerger works.

Carve-outs, Spin-Offs, and Split-Offs

You might hear a demerger called a few different names:

• A “carve-out” is when a company sells off just part of the new separate business but keeps the rest of the ownership for itself.
• A “spin-off” is when the company gives shares of the new business to its existing shareholders, so they own a piece of both companies.
• A “split-off” is sort of a mix of the two. Shareholders get to swap their shares in the original company for new shares in the split-off company.

But these are all just different types of demergers. The main idea is the same: taking part of a company, making it into a separate new company, and then selling it off.

What Happens to Shareholders?

If you’re a shareholder of a company that does a demerger, here’s what will probably happen to your shares:

When the company splits off the new business, they’ll give you new shares to replace your old ones. So if you owned stock in just the original company before, now you’ll own stock in both the original company and the new split-off company.

The exact number of new shares you get will depend on the details of the deal. But the idea is that the total value of your new shares should be about the same as the value of the old shares you had before.

You might also have the choice to swap your old shares for a bigger stake in just the new company if you’d rather do that instead of owning both.

Either way, the company should let you know the details of how the demerger will affect your shares. Make sure to read this info carefully and ask questions if there’s anything you’re unsure about.

What if I Don’t Want the New Shares?

You may find yourself with shares in this new company that you didn’t necessarily ask for. And maybe you’re not so interested in owning a piece of it.

If that’s the case, you’ll usually have a few options:

1. You can just hang onto the shares and see how it goes. Maybe the new company will do well, and the value of your shares will go up over time.
2. You can sell the new shares and cash out. This way, you get some money back right away, and you don’t have to worry about what happens with the new company.
3. If the original company is offering a share swap, you could trade your old shares for more shares in the new company. Then you could sell those if you want. Or keep them if you think the new company has a promise.

It’s really up to you and what makes sense for your own investment plans. There’s no one right answer for everyone.

Taxes on Demergers

One other important thing to think about is taxes. Depending on how the demerger is set up, and where you live, you might owe some taxes on your new shares.

In some cases, the new shares might count as taxable income, just like getting paid a bonus at work. Or, if you sell your new shares, you might have to pay capital gains tax on any profit you make.

Definitely take some time to understand the tax rules in your country. You may want to talk to an accountant or tax advisor to get advice on your specific situation.

The company should provide some info on the expected tax treatment of the demerger. But it’s still a good idea to double-check since tax stuff can get pretty complicated.

Demergers vs. Other Types of Restructuring

Companies do demergers for some specific reasons, like raising cash or getting rid of a business that isn’t working. But they’re not the only way a company might restructure itself.

Mergers and Acquisitions

For example, sometimes companies do the opposite of a demerger: they merge together into a single bigger company. Or one company might buy another one outright, known as an acquisition.

The reasons for doing this are usually different than for a demerger. Instead of slimming down and focusing on just part of the business, merging and acquiring is usually about getting bigger and expanding into new areas.

Bankruptcies and Liquidations

On the other hand, sometimes a company restructures because it’s in real trouble. If a company can’t pay its debts, it might file for bankruptcy.

In a bankruptcy, the company works with the courts and its creditors to either reorganize itself and shed some of its debts or to sell off its assets to pay back what it owes.

If the company can’t recover, it might end up liquidating. This means closing down entirely and selling everything off, using the money to pay creditors and shareholders whatever’s left.

A demerger is usually more of a strategic move, not a last resort like bankruptcy. But any kind of major restructuring is a big deal for a company. It only happens when there are serious reasons to shake things up.

Demergers in the Real World

That’s all a bit abstract. Here are a few quick examples of some real demergers that actually happened:

In 2012, the global food company Sara Lee split itself in two. One side focused on meats like Jimmy Dean sausages. The other focused on coffee and tea. Shareholders got stock in both new companies.

A few years later, eBay spun off its PayPal business into a separate company. If you owned eBay stock, you got new PayPal shares as part of the deal.

More recently, General Electric has been breaking itself up into three separate public companies: one for healthcare, one for energy, and one for aviation. Shareholders get a piece of each.

Every demerger is a bit different, but they all follow the same basic idea. By splitting off part of the business, the company aims to unlock value for shareholders that was hard to see when everything was lumped together.

The Bottom Line on Demergers

So there you have it: a demerger is a type of corporate breakup where a company splits off part of itself into a new company and sells it off to raise cash or tighten its focus.

It’s a big decision that can change the whole structure of a company. But if it’s done well, it can be a good way to get money to invest in the core business or to get rid of a part that isn’t pulling its weight.

As a shareholder, a demerger can also give you a chance to own a piece of this new separate company. You’ll want to think carefully about whether to keep these new shares or cash them out and check on the tax side.