Just as mergers are captivating, de mergers can be interesting too. There are instances when a big company gets transformed into a smaller firm due to selling of its subsidiaries. De mergers may be appealing to the shareholders of a company. There are various tools available for bringing about this restructuring process.
Tools for de merger:
The following tools are used for carrying out the process of de merger:
Equity carve outs:
Shareholder value gets enhanced by the use of this de merger method of equity carve outs. In this process, a subsidiary belonging to a parent firm is made public by IPOs or initial public offerings. This results in the sell off of shares partially. A new firm, which is publicly listed comes into being. However, the controlling power remains in the hands of the parent firm.
This process is embraced when it is found that the subsidiary is progressing at a faster pace than the parent company.
When a subsidiary of a parent company is sold off, the process is referred to as a "sell off". Sell off is carried out in case of subsidiaries, which do not find a place in the core strategy of the company.
A special type of stock is used to keep track of the value of any one segment of a firm. A publicly held company issues the tracking stocks.
Spin offs occur when a subsidiary company gets the status of an independent entity. Under such circumstances, shares belonging to the subsidiary are distributed by the parent firm by means of stock dividends.
Advantages of de merger:
The advantage of de merger is that the shareholders get access to better and updated information about the business as separate financial details are provided.
Disadvantage of a de merger:
Since the size of the de merged firms are smaller than those of the parent firm, tapping the credit market may be a difficult task especially for a small company who may not be able to afford the expensive finances.