Impact of Demerger on Shareholders’ Wealth

Abstract

Purpose – The purpose of this paper is to investigate the change in the level of the wealth of the shareholders’ before the demerger and after the demerger.

Design/methodology/approach – In the present study the data relating to share prices has been taken from the official website of Bombay Stock Exchange. Here the average of the six months price of the demerged company before demerger and average six months price or the average price upto 31^st of July, 2007 has been collected of demerged and resultant company after demerger.

Findings – It is found that after demerger there is increase in the total wealth of the shareholders in almost all the cases.

Research limitations/implications – Given the nature of this study, generalizations cannot be made as the study is conducted in a bullish market. The time specific character of the subject matter is an opportunity for future longitudinal research.

Practical implications – Presently de-mergers are creating enormous wealth for shareholders. It is because of the negative synergy. Due to the demerger this negative synergy is removed and the value is unlocked. However, Investors should differentiate between genuine attempts at value creation and de-mergers undertaken to create hype around the stocks. Stay away from dubious companies that want to manipulate prices. Investors should focus on the quality of management and corporate governance record of the company

Originality/value – The study is the first of its kind and hence original in nature.

Article Type: Research paper

Keyword(s): Demerger, Demerged Company, Resultant Company, Negative Synergy, Shareholders Wealth.