Demergers Come With Great Risks, India Inc Must Learn From Global Examples

Even as corporate India witnessed significant growth in mergers and acquisitions (M&As) in 2024, barely a month went by without a company announcing demergers too. The year 2025 started with a bang on this front with the demerger of ITC Hotels from its parent company ITC taking effect on 1 January.

Last year also saw many other companies intending to go down the same path. These included Tata Motors, Raymonds, Reliance Industries, Hindustan Unilever Ltd (HUL), Allcargo Logistics, Vedanta, NIIT, GHCL, Motherson Sumi, Edelweiss Financial and the Shipping Corporation of India. Globally, demergers have been in vogue for many years. Hewlett-Packard, General Electric, Kellogg, GSK, Johnson & Johnson, IBM, DuPont and United Technologies have been some notable ones.

So, why has this strategy become a significant trend in India today?

Focussed Strategy

Typically, demergers or spin-offs offer multiple benefits to a company, but most often there is one major compelling reason. A senior leader from the hotel industry who did not want to be named said, “The conversations on the ITC Hotels demerger have been going on for some years. So, this is a well thought out strategic move. The demerged company will also go in for an asset light strategy where it will take up management contracts with property owners so that investments and risks are limited.”

In the case of ITC, ITC Hotels hopes to enhance shareholder value, where being part of a diversified portfolio across unrelated businesses, it may not have been able to fully capitalise on the growth of the emerging Indian hospitality sector. At the same time, ITC Hotels can continue to leverage the parent’s strengths like brand equity and goodwill. Reports suggest that while the hotel division accounted for about 20% of ITC’s capital allocation, it gave a return of only about 3-4% as reflected in the company’s overall profits. Since ITC’s core business is tobacco based, some organisations like the World Health Organization’s (WHO) employees do not stay in ITC hotels. A demerger could make such organisations relook at their policies.

Tata Motors, on the other hand, decided to demerge itself into two listed entities — one for Commercial Vehicles (CV) and the other for Passenger Vehicles (PV). With limited synergies between the two divisions, this move is expected to enhance focus and agility. Tata Sons chairman N Chandrasekaran had said that the demerger will help better capitalise market opportunities and improve customer experiences.

In the case of a large conglomerate like Vedanta, demerging allows each of its businesses to better cater to specific sector needs. In the new avatar, Vedanta’s various demerged businesses will focus sharply on their respective sectors like aluminium, oil and gas, power, steel and ferrous metals.

Reliance Industries announced the demerger and subsequent listing of its financial services arm, Reliance Strategic Investments, as Jio Financial Services (JFS). This will help JFS to leverage extensive data resources and potentially create a non-banking finance company. Further, the demerger could also help in successful succession planning between Mukesh and Nita Ambani’s three children, Akash, Isha and Anant. Today, the three of them have clear oversight of Reliance Jio, Reliance Retail, and the new energy and materials businesses, respectively.

The diversified Raymond Group also made public plans last year to split itself into three entities — Raymond Ltd, Raymond Lifestyle and Raymond Realty. All three new companies will be listed in course of time. While the stated reason for this separation is to improve shareholder value, in hindsight, such separations could also help family businesses divide the company between family members. This is particularly relevant at Raymond, which has seen nasty family feuds across two generations — first, between Gautam Singhania and his father Vijaypat Singhania and uncle Madhupati Singhania. More recently, after Gautam Singhania announced his separation from his wife Nawaz Modi Singhania, the latter demanded 75% of Gautam Singhania’s $1.4 billion wealth for herself and their two daughters, Niharika and Nisa.

Finally, in tandem with its parent company Unilever’s decision to demerge its $869 million ice cream portfolio, Hindustan Unilever Ltd (HUL) also decided to spin off its ice cream business which has popular brands like Kwality Wall’s, Cornetto and Magnum. And, like in the case of ITC Hotels, HUL’s demerged ice cream business can continue to leverage its parent’s innovation expertise and brand strengths.

Not All Demergers Are Successful

Despite a number of benefits that companies aim to accomplish through spin-offs, three Bain & Company global partners, Jeff Haxer, Dustin Rohrer and Sam Rovit, after analysing more than 350 public spin-offs between 2000 and 2020, found that 50% of companies pursuing a separation failed to create any new shareholder value two years down the road, and 25% actually destroyed a significant amount of shareholder value. The study also found that on average, separation delivered as little as a 5% increase in combined market cap and that companies in the bottom quartile destroyed value by as much as 50% of the combined market cap. Much of this is attributed to significant dis-synergies, high one-time costs, entanglement across support functions and operations and complex regulatory and legal requirements.

What then can contribute to a successful separation? Experts believe that it would have to be a combination of speed of execution, comprehensive planning, committed Board and leadership, proactive risk management, right valuation and addressing talent concerns.

New Delhi-based senior corporate lawyer Rishi Bhatnagar said, “As companies scale, some verticals grow faster than others. It is then that a few of the unrelated businesses get hived off, so that it can stick to its core. Further, when compared to global brands, Indian companies and brands are not that mature. Therefore, there is space for demergers in Indian businesses. And the possibilities of failure in such separations get minimised.”

Nevertheless, while the high failure rates globally should be a warning signal to Indian companies which are rushing in for demergers, they should also draw lessons from the key drivers that make separations successful.