Company Demerger - Consulting

Demerging a company is the counterpart to merging a company. Reasons for demerging a company can be annulling negative synergies. However, more often a disruption between shareholders is decisive. A former failed merger can also cause a demerger. Another example is that a succession is about to happen. The testator wants each child to have a part of the company so that there will be no dispute among them. The conflict situation can be non-dominated (optional) or dominated (forced). The second case can happen if a company grows too big (monopole) and is forced to demerge.

Importantly, the objectives of the demerger have to be reviewed. Sometimes other solutions, which might be solved by good counselling, can be more fruitful.

When demerging a company, an environmental analysis and an analysis of the business to be demerged are vital. Afterwards, the company and the environment have to be simulated. First without the demerger and then for each of the demerged companies.

A demerger is a complex process. Each company has to function by itself. That means that all employees have to be distributed, the accounting has to be separated and the assets and liabilities have to be split. Additionally, a lot of legal questions arise like who is responsible for the loans and whether the banks agree to the transaction because the liability situation changes. Importantly, each demerged company has to have a reasonable strategy for the time after the transaction.

Different from the acquisition or sale (M&A transaction) the decision value in a company demerger is a marginal rate (quota). Often for fine-tuning, an additional payment can be helpful. Business units cannot be split up freely. In mathematics, one would speak about an integer problem. By conducting a business valuation, the decision value can be calculated.

The decision value, in the case of a company demerger the minimum acceptable marginal rate (quota) maybe with a compensation, is calculated relying on the approach of functional business valuation, while argumentation values can be calculated using a whole bunch of other methods. In the case of a company demerger the need for an impartial arbitrator might be there, and he can calculate an arbitration value, which in short distributed the benefits well between the parties.

As described earlier the conflict situation is mostly multidimensional, to say there are a variety of factors which influence the value of a company (distributing employees, legal questions about contracts, real estate).

The valuation model for the demerger of a company takes the withdrawal preferences of the shareholder, other cash flows and taxes into account. In the purest form, the decision value is a marginal rate. It is calculated how much of the future cash flow after the demerger has to be received as a minimum to not be in a disadvantageous situation. Mostly, the marginal rate (decision value) does not fit with the SBUs the company could be split into. For this reason, often an additional payment has to be made. Either the missing shares for the marginal rate in an SBU have to be recompensed, or one has respectively to recompense the other party.

The value calculation is multivalent. In other words, thousands of scenarios are simulated, and much risk is unveiled.

The legal and tax consequences caused by a demerger can be complex and will not be covered in full. Especially in an international context, when different legal systems collide, it gets complicated. But it is less dramatic than it initially sounds. The company is already used to operating in different legal systems and should have advisors in each of them. They do know the company and its legal history and can help in their sphere of expertise during the M&A transaction.

I myself do have a deep understanding of the subject of tax planning (German tax law) and the knowledge is maintained. Nevertheless, my focus will be on the coordination of the M&A process and the company valuation itself. Therefore, I will not give tax advise.

Demerging a company is a complex process, which, as described earlier, often is multi-dimensional. There can be a lot of disagreements, and it is likely that the valuation model has often to be updated. This will be my job. If the demerger takes place because of a disruption, negotiations can become quite emotional. In this case, it is a good idea to have representatives for ensuring the necessary objectivity.

For argumentation in negotiations, it is recommended to rely on the simulations which we worked out together. The different scenarios and values calculated by different methods at your disposal will be helpful.

After successfully finishing the negotiations, it will be time for the tax advisor and the lawyer to prepare the legal process and analysing possible legal and tax risks. My focus is calculating the decision value for the demerger and being there for you as a consultant. However, other experts also have their fields of expertise, especially in transnational transactions.