Assignment
Demergers boost value In the UK telecom giant BT demerged its mobile phone unit BT Cell net. Shares in the unit, now called mmO2, started trading independently of their parent on the stock market in November 2001. Corporate demergers create significant value for shareholders in both the parent company and the demerged, or separated, entity within a year of the deal being completed, a recent survey has found. The Deloitte & Touché survey in 2002 was based on an analysis of the 118 biggest demergers carried out worldwide between 1990 and 1999. The survey noted that while demerger announcements are usually greeted at the outset with a 2-10% drop in share price, there is a dramatic turnaround within a year of the demerger. The share price of most parent companies increases within the year by from 12% to more than 52%, while the separated business also fares well, with share price rises of between 13% and more than 46%. ‘Currently there is a lack of understanding about demergers, which partly explains the dip in share price on announcement, with investors fearing a loss of scale and that assets will be sold cheaply,' said Angus Knowles-Cutler, a partner in merger integration services at Deloitte & Touché.
‘In reality, the potential diseconomies of a loss of scale for both separating entities are far outweighed by the extra clarity of purpose provided by the demerger. Management is able to focus on the core business, decision making becomes easier, and motivation rises with greater sense of ownership of the smaller business and shared sense of direction,' he said. Conversely, he believes the opposite can be true of mergers. Acquiring businesses that are greeted with share price rises of 3% or more following the merger announcement usually fail to increase share value in year one, while those greeted with a share price drop under-perform even further. ‘The frequent hike in share price on announcement of a merger is often justified because the rationale behind the deal is well founded. The problems often come from clumsy integration, which has a habit of destroying focus and motivation - the factors that make demergers successful,' said Mr. Knowles-Cutler.
Question
1 On what basis are proposed merger deals often seen as attractive by investors, resulting in immediate rises in share prices?
2 Why does the share price of the merged entity often fall after its earlier rise?
3 What is the evidence for suggesting that demergers have been successful, and why?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.