What is the difference between a merger and a demerger?

A merger and a demerger are two different processes in corporate restructuring that involve the redistribution of assets, liabilities, and ownership of companies.

But both terms have some fundamental differences from each other which we will try to understand in this post.

What is a Merger?

A merger refers to the combination of two or more companies into a single entity. It involves the consolidation of businesses, resources, operations, and shareholders’ interests. In a merger, one or more companies may cease to exist as separate legal entities, and their assets and liabilities become part of the newly formed or acquiring company.

What is a Demerger?

A demerger, on the other hand, is the process by which a company separates or splits its operations into multiple entities. It involves dividing certain business segments or divisions from an existing company to form new independent entities. Unlike in a merger where companies combine their resources, in a demerger, existing shareholders receive shares in both the existing company and the newly created entity.

Key Differences Between A Merger and a Demerger

Purpose

The purpose behind a merger is often to create synergies by combining complementary businesses, expanding market presence, increasing operational efficiency, or gaining competitive advantages. It can also result from strategic alliances or acquisitions.

In contrast, a demerger aims to simplify business structures by separating different lines of business within a single entity. Reasons for demergers can include focusing on core activities, divesting non-core assets or underperforming divisions, and improving overall organization structure and governance.

Legal Structure

A merger can take different legal forms depending on jurisdiction and circumstances such as statutory merger, consolidation, acquisition etc.

In comparison, demergers have various options such as spin-offs (creating separate independent companies), split-offs (transferring divisions/business units to another already existing company), and equity carve-outs (offering shares of subsidiary through IPOs), among others.

Ownership

In most mergers involving listed companies or significant shareholdings transactions occur through an exchange of shares according to a predetermined swap ratio. Existing shareholders of the merging companies often become shareholders of the merged entity in proportion to their ownership.

Demergers can result in different ownership structures. Existing shareholders may receive shares or stock options in both the original company and the demerged entities according to a predetermined ratio or separate valuation methods.

Conclusion

In summary, while mergers involve the combination of two or more companies into one entity, demergers involve dividing a single company into multiple entities. Mergers seek to create synergies and growth opportunities, while demergers aim to simplify business structures and allocate assets among separate entities.