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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

A conglomerate's board is considering demerging a low-growth subsidiary. Which of the following is the most likely strategic benefit that would justify the demerger?

The most likely benefit is removing a conglomerate discount. Separate listing lets investors value each business on its own performance, with sharper management focus and clearer reporting. A pure demerger raises no cash, reduces rather than increases diversification, and the parent no longer controls the subsidiary.

  1. AIt removes a conglomerate discount by letting the market value each business on its own meritsCorrect
  2. BIt guarantees an immediate increase in the parent's total cash balances
  3. CIt eliminates all tax liabilities arising on the separation
  4. DIt increases the diversification of the parent's remaining earnings
  5. It allows the parent to retain full control over the subsidiary's strategy

Explanation

Demergers often aim to unlock value by removing a conglomerate discount and giving focused management and clearer valuation. A pure spin-off brings in no cash, does not remove all taxes, reduces diversification, and ends parental control.

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