Understanding a demerger process: The divorce metaphor

Highlights

• A demerger process of previously merged companies can be divided into six phases.

• These phases correspond to high extent to a divorce process between spouses.

• Phase 1 –disillusionment – can be lengthy and might start directly after the M&A.

• The M&A motives play a major role for the nature of the phases.

Abstract

This article contributes to the literature on mergers and acquisitions that hitherto has neglected the demerger of previously merged/acquired firms by offering a process description. To provide structure and deliver insights into such a process, we apply the metaphor of a divorce process and use insights from a case study—namely, the demerger between Ford Motor Company and Volvo Cars Corporation. Our findings suggest that a demerger process of previously merged/acquired firms can be divided into six phases: disillusionment, erosion, detachment, physical separation, mourning, and second adolescence/hard work. The motives for the initial merger or acquisition and the degree of integration are possible factors argued to play a major role in the identified phases during the demerger.

Introduction

Mergers and acquisitions (M&As) are among the most noteworthy corporate strategies in today’s globalized business landscape as they are used to accelerate growth, access and expand on valuable capabilities or assets, and reduce competition (Brueller, Carmeli, & Markman, 2018; Caiazza & Volpe, 2015). In 2016, M&A activity reached its third highest deal value since 2007, with more than 17,000 deals worth USD 3.2tn (Mergermarket, 2016). However, many M&As fail to meet their objectives (Steigenberger, 2017), resulting in reported M&A failure rates as high as 70% (Christensen, Alton, Rising, & Waldeck, 2011). Not surprisingly, many M&As not meeting expected goals are later divested (Bergh, 1997; Ravenscraft & Scherer, 1987; Shimizu, 2007; Shimizu & Hitt, 2005). Even in the 1990s, Kaplan and Weisbach (1992) learned that 44% of the acquisitions in their study were later divested. Two decades later, Deloitte (2018) found that 70% of 123 global organizations stated that they had undertaken more than one demerger in the preceding three years and equally as many expected to make at least one in the coming two years.

The terms demerger and divestiture are often used as synonyms, among others, resulting in the fact that no common definition exists for a demerger (Böllhoff, Brast, & Grüger, 2007). Whereas some researchers understand a demerger as one form of divesture (e.g., Kirchmaier, 2003; Stonham, 1997)—that is, to spin off a division of an existing entity into a separate entity without any change in the ownership—others use the term demerger as an umbrella term for all firm divestitures (e.g., Basak, 2016). These studies lack a differentiation of the reasons behind the deal – that is, whether the divestiture is merely a reflection of the economic cycle, a proactive strategic step or a means to reverse a previous strategic decision. In this study, drawing on the thoughts of Charifzadeh (2002) and Cascorbi (2003), we define a demerger as the reversal of a previous M&A between two firms, where the pre-M&A status is re-established, either completely or partly. The demerged entity can be spun off, divested, or sold. Please note that a demerger can be the reversal of both a previous merger and an acquisition. Henceforth, when using the term demerger, we refer to this definition.

Despite demergers being widespread, such restructurings have with few exceptions (Hoare & Cartwright, 1997; Shimizu & Hitt, 2005; Xia & Li, 2013) been ignored in the M&A literature. Furthermore, these studies have neglected the actual separation process or offer only a conceptual description (e.g., Böllhoff et al., 2007; Pickering, 2002). Similarly, the divestiture literature has a long tradition of studying the splitting up of firms into two or more independent entities (Kirchmaier, 2003; Xia & Li, 2013), but not the separation of two previously merged or acquired units, which is different and requires special attention (Hoare & Cartwright, 1997; Xia & Li, 2013). A possible explanation for the lack of research into demergers is that they are perceived as defeat and a sign of weak management (Böllhoff et al., 2007), making access difficult for researchers. Then again, demergers can also serve as important strategic tools to generate value by, for example, removing inefficient organizational structures, handling strategic misfit, and eliminating negative synergies (Kirchmaier, 2003). Consequently, this paper argues that research is needed to explore and thereby create a better understanding of demergers of previously merged or acquired firms. Hence, this paper addresses the following research question: How does the demerger process of previously merged or acquired firms unfold? The aim of this paper is to propose a process description to provide structure and deliver insights into the demerger process of previously merged or acquired firms. By offering such a process description, we contribute to the demerger literature—and thereby, as previously elaborated, the divestiture and M&A literature—that hitherto largely has ignored the actual demerger process.

The lack of studies in this area made us search for other streams of research to elucidate the demerger process and, just like the literature on M&As that has applied the marriage and related metaphors to discuss M&As (Allred, Boal, & Holstein, 2005; Cartwright & Cooper, 1993, 1996; Kale & Singh, 2009; Rottig, 2013; Schweizer, 2005), we apply the metaphor of a divorce process using insights from the fields of sociology and psychology (e.g., Allen & Hawkins, 2017; Amato, 2010; Amato & Anthony, 2014; Angwin & Meadows, 2015; Basak, 2016; Bauer & Matzler, 2014; Bergh, 1997, 2015; Bergh, Johnson, & Dewitt, 2008; Berman, 1988; Bigley & Wiersema, 2002; Kessler, 1975; O’Connell Corcoran, 1997). The demerger between Ford Motor Company (FMC) and Volvo Cars Corporation (VCC) is used to illustrate the unfolding of the process. As is true for any single case study, it is also important to emphasize the idiosyncrasies of the case. We study the demerger of a previous acquisition of VCC by FMC that occurred due to unachieved synergies as well as a strategic change in FMC due to a constrained financial situation. Furthermore, immediately after the demerger, VCC was sold to Zhejiang Geely Holding Group (Geely). Hence, referring to the previously discussed definition of a demerger, we study the reversal of a previous acquisition, where the pre-acquisition status is re-established completely and the demerged unit is sold. As discussed in the concluding part, we have gained insightful findings from the study for further research, yet these idiosyncrasies have impact on our findings.

The paper is organized as follows. In the next section, insights from the divestiture literature and the rare papers on demergers are presented to frame the demerger process. A complete overview of the former literature is not offered (for a recent overview, please see Bergh, 2015); rather, as our aim is to study the process of the demerger of previously merged or acquired firms, we focus on insights gained from the divestiture literature that assist in understanding the reasons for and the subsequent implementation of a demerger. We use the term demerger even if the authors cited used other terminology if their description is congruent with our definition. Partly provoked by empirical insights from the case study and drawing on the thoughts of Cartwright and Cooper (1993), we include insights from the M&A literature and, in particular, refer to studies on the post-M&A integration process. At least intuitively, whereas a demerger is the reversal of an M&A, the subsequent disintegration process can be mirrored with the post-M&A integration process (Cartwright & Cooper, 1993; Schweizer & Lagerström, 2014). This discussion is followed by findings from studies capturing the divorce process between spouses, which offer an encompassing framework. Thereafter, methodological considerations of our abductive case study are discussed, followed by an introduction to the case. Then the case is discussed through the lens of the emerged theoretical framework. Finally, we conclude with contributions and avenues for further research.