Question

. Bajaj auto Limited has been a leading two wheeler and three wheeler automobile manufacturing company...

. Bajaj auto Limited has been a leading two wheeler and three wheeler automobile manufacturing company for many years. For quite some time it also engaged in auto finance through its subsidiary Bajaj Auto Finance. In recent years, it set up subsidiaries for doing life insurance business and general insurance business. Given its substantial presence in the auto sector and finance and insurance sector, the company felt the need for separating its auto business and financial assets. In order to do this the company has done a demerger in early 2008.

a. Site the essence of demerger plan of Bajaj auto Limited.

b. State the after effect of the demerger.

c. Discuss the advantages of professional specialization in this context.

Homework Answers

Answer #1

a. The essence of the demerger plan of Bajaj auto Limited are

  • It will create two separate entity hence allow the management to focus on each sector properly
  • It will also allow exploring growth opportunities and focus on its core business
  • The investor will be able to hold focused stocks post demerger as earlier it was a conglomerate
  • It will improve the transparency of each business line as diversification of operation happens

b. After effects of demerger will be

  • The drop-in stock price due to the separation of assets which would change the book value also.
  • EPS gets diluted
  • Minority shareholder's stake gets devalued

c. To conduct a demerger a professional can help throughout the process as we have to identify

  • Assets related to the resulting companies
  • Liabilities related to the resulting companies
  • New financial statements have to be created for each company
  • Tax scrunity
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