Companies like L&T and Reliance have demerged their entities which is beneficial to their shareholders. The article discusses the process of demerging and how it impacts the shareholders wealth.

Historically demergers have enhanced shareholder value. Whether it is the demerger of Reliance Industries or Larsen and Toubro, which hived off cement division, or demerger of Godrej Soap into Godrej Consumer and Godrej Industries, investors have benefited hugely as the demerged entities have created substantial wealth.The London School Economics in a study of 38 demergers found that demergers are beneficial to shareholders both at the time of the announcement and after a span of two years. In India, the demergers of two giant corporates, for example, Larsen and Toubro (L&T) Ltd. and Reliance Industries Ltd. (RIL), proved to be successful demergers that benefited shareholders immensely. The compelling reasons for demergers and the proactive measures which lead to enhanced market value are discussed through these illustrations.

Demerger is a process of corporate restructuring in which a single or multiple business unit(s) are spun off as a new entity. Demerger is just the opposite to merger and tends to go in and out of fashion. When the market prices of shares are rising, the companies like to use their shares to acquire other companies. At this juncture, advisors of the company may suggest and encourage for a merger after taking over the other company. Whereas in a falling market, mergers and initial public offers are less popular, and the merchant banks, who normally earn their fees from corporate activity, start looking at demerger possibilities of their clients. Demerger is not of recent origin. In the UK, Argos was spun out from British American Tobacco in 1990 and Zeneca was spun off from ICI in 1993. In India, the most prominent demergers in recent times include the cement division of L&T Ltd., named as Ultratech Cement Ltd., and the demergers of four entitiesReliance Communication Ventures Ltd., Reliance Energy Ventures Ltd., Reliance Natural Resources Ventures Ltd., and Reliance Capital Ventures Ltd.which spun out from RIL. While the demerger of Ultratech from L&T seems to be one of L&T's grand strategy to concentrate more on Infrastructure, Engineering, Energy and Turnkey businesses, the demergers of RIL were the outcome of ownership settlements between two siblings (promoters) in RIL.

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