Breaking up is easy for shareholders

While demerger announcements were initially greeted with up to a 10% drop in share price, the study revealed a dramatic turnaround within a year of the break up.

According to Deloitte & Touche, which studied the 118 largest demergers worldwide between 1990 and 1999, parent company share prices rose by 12% for a median performer to more than 52% for upper quartile performers – the separated business also fared well, with share price rises of nearly 50% for upper quartile performers.

Angus Knowles-Cutler, a merger integration specialist at D&T, said there was a lack of understanding about demergers, which explained the dip in share price following an announcement.

‘In reality, the potential diseconomies of scale for both separating entities are far outweighed by clarity of purpose provided by the demerger,’ he said.Knowles-Cutler added the frequent hike in share price on announcement of a merger was often justified as the rationale behind the deal.

‘The problems often come from clumsy integration, which has a habit of destroying focus and motivation – the factors that make demergers successful,’ he said.

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