The year 2025 began with a landmark event in corporate India: the demerger of ITC Hotels from its parent company, ITC, on January 1. This move reflects a growing trend among Indian businesses, which saw a wave of mergers and acquisitions (M&As) in 2024, often accompanied by announcements of demergers. Prominent companies like Tata Motors, Reliance Industries, Raymonds, and others are embracing this strategy to unlock shareholder value and streamline operations.
While demergers can provide strategic advantages, they also carry inherent risks, as seen in global examples. This article explores why demergers are gaining traction in India, their potential benefits, challenges, and lessons to be learned.
Why Demergers Are on the Rise
1. Focused Strategy
Demerger allows companies to streamline their operations and focus on their core businesses. For instance:
- ITC Hotels plans to adopt an asset-light strategy by entering management contracts with property owners, reducing investment risks while leveraging the parent company’s brand equity.
- Tata Motors separated its Passenger Vehicles (PV) and Commercial Vehicles (CV) divisions, citing limited synergies. This move is expected to enhance agility and tap into distinct market opportunities.
2. Enhancing Shareholder Value
Many Indian companies aim to improve shareholder value through demergers:
- Reliance Industries demerged its financial services arm, creating Jio Financial Services (JFS). This helps JFS leverage data resources and aligns succession planning for Mukesh Ambani’s children.
- Raymond Group split into three entities—Raymond Ltd, Raymond Lifestyle, and Raymond Realty—potentially resolving long-standing family disputes while enhancing focus on specific sectors.
3. Sector-Specific Growth
Unbundling allows businesses to cater to specific industries:
- Vedanta separated its operations into distinct verticals like aluminium, oil and gas, steel, and others, to address the unique demands of each sector.
- Hindustan Unilever Ltd (HUL) spun off its ice cream business, retaining the ability to leverage the parent company’s innovation capabilities.
The Global Perspective: Learning from International Demergers
Globally, demergers have been prominent among corporations like Hewlett-Packard, General Electric, IBM, and others. However, studies reveal mixed results:
- A Bain & Company analysis of 350 public spin-offs (2000-2020) found that:
- 50% failed to create new shareholder value two years after separation.
- 25% destroyed significant value, with the bottom quartile losing up to 50% of combined market capitalization.
- Causes of failure include dis-synergies, high costs, operational entanglements, and complex legal requirements.
Keys to Successful Demergers
Experts emphasize that successful separations depend on several factors:
1. Speed and Planning: Quick execution paired with comprehensive strategies.
2. Leadership Commitment: Active involvement of boards and senior management.
3. Risk Management: Addressing regulatory, legal, and operational risks proactively.
4. Talent and Operations: Retaining talent and ensuring smooth transitions in operations.
5. Accurate Valuation: Properly valuing assets and businesses to avoid overestimations.
Risks to Consider in Demergers
Indian companies must tread carefully to avoid pitfalls, including:
1. High One-Time Costs: Legal, regulatory, and operational expenses can outweigh potential gains.
2. Dis-Synergies: Loss of operational efficiencies and shared resources.
3. Uncertain Market Reception: Investors may not always respond positively to the separation.
Conclusion: Opportunities and Caution for India Inc
Demergers offer Indian businesses a pathway to growth, focus, and enhanced shareholder value. However, as global failure rates indicate, the risks cannot be ignored. Companies must adopt rigorous planning, proactive risk management, and clear execution strategies to ensure success. While the trend reflects India’s evolving corporate maturity, drawing lessons from international examples will be crucial in making demergers a sustainable strategy for growth.