posted on 06-06-2019

De-Merger

Updated August 10, 2020

What is a De-Merger?

A de-merger is the partial or full sale of an asset or business segment.

How Does a De-Merger Work?

Let's assume Company XYZ is the parent of a food company, a car company and a clothing company. If for some reason Company XYZ wants out of the car business, it might divest the business by selling it to another company, exchanging it for another asset, closing down the car company or filing for bankruptcy altogether. Company XYZ can conduct this de-merger over a long period of time, and it might choose to only sell a portion of the car business (i.e., diversify away from the car business but still have a stake in it).

Why Does a De-Merger Matter?

Optimists often look at de-merger activity as ways to streamline (i.e., "get back to basics"), reduce debt and enhance shareholder value; pessimists often view it as concessions that the businesses were not performing well. Both are usually right.

De-mergers can be complicated from an accounting perspective, and there are many ways to structure them to optimize tax laws, employee incentives, union relationships and other key relationships.