Demerger activity predicted to rise

High levels of demerger activity are expected over the next year by chief executives at the world’s largest companies, according to research commissioned by City law firm Allen & Overy LLP.
The research, which canvassed the opinions of CEOs, CFOs and other director-level executives at FTSE 350 and Fortune 500 companies, revealed that almost two-thirds of respondents expect demergers to be active in their sectors in the next 12 months (66%).

Demergers are seen by 60% of FTSE 350 respondents as a positive management tool, with the key drivers being seen as eliminating negative synergies (86%), low market valuation (70%) and shareholder pressure (64%).

The report, Drivers of Demergers: an Executive Outlook, reveals almost all those surveyed expect hedge funds and activist investors to influence demerger activity (87%) while almost two-thirds see taxation issues as the major obstacle to demergers (61%), with a third saying pensions make pursuing demergers difficult (34%).

Mainland Europe emerged as a popular choice for demerger growth among FTSE 350 director level respondents. Fortune 500 respondents predicted that the large stock of conglomerates in Asia Pacific will make the region ripe for rationalisation across many main markets.

Richard Cranfield, global head of mergers and acquisitions at Allen & Overy says the benefits of demergers can be manifold and include unlocking shareholder value by isolating underappreciated businesses and improving company focus by stripping out non-core businesses.