Successful demergers: How planned communication can help

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When a demerger is in process, a carefully formulated and implemented communication plan is essential to help the new entity rapidly establish identity, direction, and self-confidence. This field is not, however, the core specialisation of lawyers who handle demerger transactions. Jonathan Steffen explains how planned communication can be used to preclude loss of business value in the first months of a demerged entity’s existence.

Q: In terms of communications, what is the difference between a demerger and a merger?

A: A demerger involves breaking away from an established entity in order to create something new. A merger, by contrast, involves coming together with an established entity in order to create something new. The sense of direction is crucial. Employees of a demerged organisation frequently experience feelings of insecurity, exposure and resentment, perceiving themselves as having been rejected by the parent organisation. This is implicit in the terminology of ‘spin-offs’ and ‘hive-offs’. It is thus essential to communicate effectively to all staff the rationale behind the demerger, the dictates of the market, and the potential benefits which the demerger holds in store for both the company and its employees if they approach the altered situation with a positive attitude.

Q: What about the new entity’s customers?

A: The customers of the new organisation might not feel the same sense of personal aggrievement experienced by some employees, but they are likely to be confused by the change. If not provided with adequate information and a guarantee of continued supply, they will quickly switch allegiances. The same goes for suppliers themselves. Speedy information, the maintenance of key processes during the phase of change and the swift renegotiation of contracts, where appropriate, are essential. Equally vital is the provision of a full and clear explanation to the organisation’s investors.

Q: If the new company is producing what it always did, why is this so urgent?

A: Despite the assurances so frequently given to the contrary, any change in legal status has major implications for the entirety of an organisation. Contracts of employment, company pension and benefit plans, patents, intellectual rights, trademarks, liabilities, strategic alliances, training and development processes and IT systems will all have to be reviewed. An organisation that makes a success of its demerger will naturally define itself in contradistinction to the parent company, even if it is sent on its way with certain intellectual rights, systems and processes, and market share. Change is pre-programmed.

Q: Who should be responsible for this communication effort?

A: Ideally, the marketing and personnel functions working in close liaison with the legal department. If marketing (external communications) and personnel (internal communications) do not work closely together, the new company will present a divided front to the world and weaken its already exposed position. In larger companies, this responsibility will fall to the corporate communications and corporate planning departments in collaboration with marketing and personnel. Many companies call on outside expertise to help plan and implement specific communication projects.

Q: What are the personnel implications?

A: If the new company is to be successful, it must retain and attract the top talent. A spin-off or hive-off is, however, likely to trigger corporate haemorrhage, with the brightest stars leaving the company in search of better prospects elsewhere. For those who are left, corporate paralysis can easily set in, making the company even less attractive to potential recruits, which will diminish its value yet further.

Q: What is the key lesson for management?

A: A proactive, positive attitude, strong leadership and a carefully co-ordinated communication effort are vital to give a demerged entity a good chance of success during its first months of existence – the months most crucial to its success.

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