Hedge funds expected to lead a demerger boom

Top executives expect a rash of demergers as they seek to undo many of the deals that were done in the recent takeover boom.

According to a survey commissioned by City law firm Allen & Overy, 87 per cent of the FTSE 350 and Fortune 500 chief executives queried said the expected uptick in disposals will be driven by aggressive hedge funds.

"The growth of hedge funds and private equity has really changed the mindset of listed companies. The demerger is seen as a completely standard tactic, whereas before it was seen as a sign of management failure," said Richard Cranfield, head of mergers and acquisitions at Allen & Overy. "Demergers tend to follow an intense period of merger activity."

Merger and acquisition activity reached an all-time peak this year with more than $1.1 trillion worth of transactions announced in June. The meltdown in the credit markets in the past month threatens to derail the boom. The financings of several deals, like Alliance Boots, have been postponed, while other transactions have been shelved.

Demergers are tax-free divestitures that lead to the public listing of a new company in which shareholders in the mother company are given shares. Sixty per cent of the more than 100 chief executives interviewed for the survey see demergers as a "positive strategy."

Man Group, the hedge fund giant, floated its US brokerage unit MF Global on the New York Stock Exchange earlier this summer. Mining giant Anglo American listed its Mondi paper business in London.

The increased popularity of demergers reflects a corporate environment that has changed vastly, bankers said, due to the latent threat represented by hedge funds, who now control more than $1.6 trillion. The increase in the amount of capital that private equity firms have at their disposal has created another pressure point.

"Many of the deals done in recent years were of questionable logic. Some will now get undone. Chief executives can't afford to be complacent," said a banker.

Bankers expect sales of recently purchased companies. Carlyle, the private equity firm mulling a buyout of Virgin Media, is understood to be examining selling off its Virgin Mobile business if it succeeds. Virgin Media paid nearly £1bn for the company last year.