Let Demergers Drive Value for Stakeholders

By shedding conglomerate clutter, unlocking growth potential, and sharpening operational focus, they align the interests of companies and shareholders

- DHANENDRA KUMAR

DEMERGERS ARE INCREASINGLY becoming tools for large companies to unlock shareholder value. In recent years, large Indian and global companies have used this method to separate or hive off their business units either because the sum of the part valuation is more than the prevailing one or because the individual business units no longer need the support of their parent entity.

To be sure, demergers have long been in vogue as a concept globally. For instance, the mid-90s saw the creation of Lucent Technologies through a spin-off from AT&T. Similarly, Conoco emerged after a split from chemicals major DuPont. The 2000s continued this trend with major corporate restructurings at conglomerates like Tyco and the Altria Group. In India, too, demergers have become a compelling avenue for wealth creation in the last two decades. From the various corporate actions at Reliance Industries to the recent demergers announced/completed by Raymond, Quess Corp, and Vedanta, India Inc is increasingly embracing this mechanism. But what makes demergers so potent, and why should investors care?