The completion of a demerger between insurer Prudential PLC (LON:PRU) and its former UK business M&G PLC (LON:MNG) on Monday marked the end of a 19-month that has cost the group an estimated £355mln.
The immediate aftermath of the split was mostly to be expected, with Prudential shares down 9% at 1,370p in late-afternoon as investors revalued the business, while M&Gs shares were around 221.1p, a touch above their float price of 220p and implying a market cap of £5.7bn.
READ: Prudential shares revalued downwards following split from UK business M&G[hhmc]
This was slightly below forecasts from analysts at Citi, which last week valued M&G at around £6bn.
The bank also pegged M&G with an implied dividend yield of 7.75% against its peers, although only time will tell if these forecasts ring true.
Pursuing a demerger, much like its twin sister, a merger, has its share of advantages and disadvantages, some of which are outlined below.
Greater value
A big draw of demergers in their potential to unlock additional value for shareholders in the firm that is demerged.
Normally, shareholders in a company will be given shares in the two new companies following a demerger, which when combined with the advantages of specialist management and focus on specific business segments can result in greater overall profitability.
This, in turn, causes share prices to rise, with a 2013 research paper showing that share prices increase by around 3.3% in the immediate aftermath of a demerger announcement.
Fixing accountability
A demerger can also fix issues with accountability that may plague a firm with contrasting departments, as a separate entity allows the division to take care of its own financial position without any cross-pollination of cash that may result in a combined business.
It also provides a clearer path to accountability for any failure in the business and avoids management receiving blame for a business failure that they may not have had direct control over.
Tapping the market
Aside from the benefits to shareholders, a demerger also allows a companys business units to tap the stock market for capital as separate listings rather than having to rely on funding being allocated internally.
A key example is PayPal Holdings Inc (NASDAQ:PYPL), which in 2014 was split off from online auction giant eBay Inc (NASDAQ:EBAY) after the payments business effectively outgrew the support constraints of its parent and instead took its chances with investors on the open market amid a boom in online payment usage.
The decision proved to be a shrewd one, with PayPals shares having increased over 190% in the intervening years to US$101.3, while eBays share price has increased around 77% to US$39.1.
Smoother operations
One of the key benefits of a demerger is that it allows all areas of a business to be attended by dedicated management boards, rather than a single board of directors having to manage multiple segments of the company.
A demerger can also allow the newly separate companies to appoint specialists to manage specific areas or brands rather than more general directors which would be required for a conglomerate covering multiple areas.
An example is the 2008 demerger of then Read More – Source
