demerging

Demerger is a corporate restructuring process in which a parent company separates a business unit to form one or more independent entities. The unit’s assets, liabilities, contracts, and personnel are transferred to the new company, which becomes legally independent from the parent. Depending on the chosen structure, the parent may retain an ownership stake in the new entity, or shareholders may receive shares of the new company through a spin-off, exchange their parent shares for the new company’s shares in a split-off, or a portion of the new business may be sold in a carve-out.

Forms of demerger include spin-offs, where the new company’s shares are distributed to the parent’s shareholders; split-offs, where shareholders exchange parent shares for the new company’s shares; and carve-outs, where a minority stake in the new entity is sold to external investors. The specific mechanics vary by jurisdiction and deal terms.

Reasons for pursuing a demerger include a desire for strategic focus on core activities, improved management accountability and operational performance, enhanced capital allocation, regulatory or antitrust considerations, risk isolation, and potential tax or financing advantages. A demerger can unlock value by allowing market participants to value each business more accurately.

The process typically involves identifying the unit to be separated, valuing the business, separating assets and liabilities, disentangling intercompany contracts and funding, reorganizing human resources, obtaining regulatory approvals, and, if applicable, listing the new entity or arranging share exchanges. There are often significant implications for employees, creditors, customers, and suppliers, and for the parent’s governance and credit profile.

Notable examples include Hewlett-Packard’s 2015–2016 spin-off of Hewlett Packard Enterprise, and the DowDuPont restructuring that led to three independent companies between 2017 and 2019.