• At Kemp Little, we are known for our ability to serve the very particular needs of a large but diverse technology client base. Our hands-on industry know-how makes us a good fit with many of the world's biggest technology and digital media businesses, yet means we are equally relevant to companies with a technology bias, in sectors such as professional services, financial services, retail, travel and healthcare.
  • Kemp Little specialises in the technology and digital media sectors and provides a range of legal services that are crucial to fast-moving, innovative businesses.Our blend of sector awareness, technical excellence and responsiveness, means we are regularly ranked as a leading firm by directories such as Legal 500, Chambers and PLC Which Lawyer. Our practice areas cover a wide range of legal issues and advice.
  • Our Commercial Technology team has established itself as one of the strongest in the UK. We are ranked in Legal 500, Chambers & Partners and PLC Which Lawyer, with four of our partners recommended.
  • Our team provides practical and commercial advice founded on years of experience and technical know-how to technology and digital media companies that need to be alert to the rules and regulations of competition law.
  • Our Corporate Practice has a reputation for delivering sound legal advice, backed up with extensive industry experience and credentials, to get the best results from technology and digital media transactions.
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  • At Kemp Little, we advise clients in diverse sectors where technology is fundamental to the ongoing success of their businesses.They include companies that provide technology as a service and businesses where the use of technology is key to their business model, enabling them to bring their product or service to market.
  • We bring our commercial understanding of digital business models, our legal expertise and our reputation for delivering high quality, cost-effective services to this dynamic sector.
  • Acting for market leaders and market changers within the media industry, we combine in-depth knowledge of the structural technology that underpins content delivery and the impact of digitisation on the rights of producers and consumers.
  • We understand the risks facing this sector and work with our clients to conquer those challenges. Testimony to our success is the continued growth in our team of professionals and the clients we serve.
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  • Our clients trust us to apply our solutions and know-how to help them make the best use of technology in structuring deals, mitigating key risks to their businesses and in achieving their commercial objectives.
  • We have extensive experience of advising customers and suppliers in the retail sector on technology development, licensing and supply projects, and in advising on all aspects of procurement and online operations.
  • Our legal professionals work alongside social media providers and users in relation to the commercial, privacy, data, advertising, intellectual property, employment and corporate issues that arise in this dynamic sector.
  • Our years of working alongside diverse software clients have given us an in-depth understanding of the dynamics of the software marketplace, market practice and alternative negotiating strategies.
  • Working with direct providers of travel services, including aggregators, facilitators and suppliers of transport and technology, our team has developed a unique specialist knowledge of the sector
  • Your life as an entrepreneur is full of daily challenges as you seek to grow your business. One of the key strengths of our firm is that we understand these challenges.
  • Kemp Little is trusted by some of the world’s leading luxury brands and some of the most innovative e-commerce retailers changing the face of the industry.
  • HR Bytes is an exclusive, comprehensive, online service that will provide you with a wide range of practical, insightful and current employment law information. HR Bytes members get priority booking for events, key insight and a range of employment materials for free.
  • FlightDeck is our portal designed especially with start-up and emerging technology businesses in mind to help you get your business up and running in the right way. We provide a free pack of all the things no-one tells you and things they don’t give away to get you started.

The urge to demerge

Activist investor Carl Icahn has lobbied eBay for a demerger of PayPal for most of 2014. He was vindicated at the end of September when eBay announced that it would spin off its online payment processing arm some time in 2015. eBay announced that it will create two independent public companies, which will take up to twelve months to complete, to ensure that each business is best able to serve its customers’ needs and thrive in the future.

Over the past few months, the press has reported a rash of upcoming spin-offs. As well as the eBay/PayPal demerger, well-known companies across a range of sectors have recently announced upcoming demergers. BHP Billiton announced in August that it was demerging its key assets and hiving off some of its unwanted mines and plants into a separate company. Commentators have observed that this effectively reverses the “mega merger” in 2001 between BHP and Billiton. Hewlett-Packard has announced that it plans to separate its computer and printer businesses from its corporate hardware and services operations. Blackstone has recently announced that its board approved a plan to spin off its financial and strategic advisory services, restructuring and reorganisation advisory services – again, this transaction is expected to close in 2015.

There are many reasons why a company might spin off a non-core business or assets. The ultimate aim in many cases will of course be to increase shareholder value and realise the value of the underlying businesses, but it may also be a means of allowing the separated businesses to focus on their particular sector or market and pursue independent strategies, or to separate businesses where one places a regulatory or financial restriction on the other. It might also be to simplify the corporate group structure or to unbundle a joint acquisition.

A demerger may be an alternative to a sale when there is no obvious buyer for the asset or business, the desired price is unlikely to be realised or prevailing market conditions mean that a sale is likely to be difficult to achieve.  A demerger might also be an intermediate step to divestment and it is possible that the entities resulting from the recently-announced demergers become attractive acquisition candidates themselves following the demerger.

There are numerous ways available under English law for companies to demerger businesses or assets. The type of demerger structure will be driven by a number of legal, commercial and tax considerations – including the availability of distributable reserves, eliminating/reducing any potential tax charges and qualifying for tax reliefs, and the need for shareholder and third party approvals. Tax planning in particular should be considered from the outset.

Identifying the assets and liabilities to be demerged/retained is relevant to both a divestment and a demerger, although where there is no immediate divestment it is more a matter of internal negotiation. The split of intellectual property and what to sell, keep and licence is a particular issue, as joint ownership is generally not an attractive option under English law. Where there is a sale of the new entity following the demerger, warranties will be requested – a common issue is whether the warranties are limited to the transferred assets or the whole of the business.

Gathering financial information can be difficult in a large group context since many report internally on a divisional rather than a legal entity basis. It might therefore be difficult to assemble information about revenue, profits and balance sheets of the individual legal entities or businesses. This information is vital as it will be needed to model tax charges amongst other things.

Debt financing arrangements may be disrupted by the demerger – for instance, the demerger may require consent from lenders. The company’s contractual arrangements may also be disrupted - how, for instance, will contracts which apply to both businesses be split up? Will there be any detrimental effects, such as a loss of volume discounts or parent level negotiated benefits? Can the contracts be transferred without third party consent?

Once the demerger has been effected, transitional support is often required for IT services, facilities, operations etc. These issues may have a major impact on the economics of a demerger. There might also be longer term strategic partnering agreements if the demerged entity is disposed of after the demerger.

It’s clear from all this that demergers are complex beasts that absorb considerable management time and external advisory costs can be considerable. 

Given all the costs and complexities, what’s driving the urge to demerge?

There are at least three main reasons.

First, many of the mergers that took place (expertly induced by the investment banks) have failed to generate value to shareholders and the economic and strategic logic that was said to underpin those deals has simply failed to materialise.

Second, a number of CEOs (and their advisers) simply misread macroeconomic and industry-specific trends. Witness the massive overcapacity in the extractive industries and the disruptive influence of the cloud.

Third, for large listed groups with activist shareholders on their register, it’s often the disproportionately large influence that such corporate agitators have and the consequent fear of incumbent management being unseated by them.

None of this is to say that demergers are to be avoided; there are many instances of spin offs generating significant value to shareholders. But, more often than not, they are an expensive and complex admission of a wrong-headed merger.

For more information, please contact Andy Moseby.