2-1-2-External-Inorganic-Business-Growth

课 Progress

0% Complete

Exam code:1BS0

External (inorganic) business growth

Firms will often grow organically to the point where they are in a financial position to integrate (merge or takeover) with others
- Integration in the form of mergers or takeovers results in rapid business growth and is referred to as external or inorganic growth
A merger occurs when two or more companies combine to form a new company
- The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
A takeover occurs when one company purchases another company, often against its will
- The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations

There are several reasons why companies may choose to pursue mergers and takeovers

Strategic fit
A company may acquire another company to expand into new markets, diversify its product offerings, or gain access to new technology E.g. in 2010 Kraft Foods purchased Cadbury’s to increase its product offering and expand business sales in the United Kingdom
Lower unit costs
Larger companies are able to achieve lower unit costs as they receive many benefits from being large (e.g. bulk purchase discounts on supplies and better interest rates from banks on loans)
Synergies
Synergies are the benefits that result from the combination of two or more companies, such as increased revenue, cost savings, or improved product offerings
Elimination of competition
Takeovers are often used to eliminate competition and the acquiring company increases its market share. E.g. Meta, the parent company of Facebook purchased WhatsApp in 2014 and continued to run the messaging service alongside their own Facebook Messenger
Shareholder value
Mergers and takeovers can also be used to create value for shareholders. By combining companies, shareholders can benefit from increased profits, dividends and higher stock prices

Inorganic growth usually takes place when firms merge in one of two ways
- Vertical integration (forward or backwards)
- Horizontal integration

Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain
- E.g. A dairy farmer merges with an ice cream manufacturer
Backward vertical integration involves a merger/takeover with a firm further backwards in the supply chain
- E.g. An ice cream retailer takes over an ice cream manufacturer

Type of growth	Advantages	Disadvantages
Vertical integration	Reduces the cost of production as middleman profits are eliminated Lower costs make the firm more competitive Greater control over the supply chain reduces risk as access to raw materials is more certain The quality of raw materials can be controlled Forward integration adds additional profit as the profits from the next stage of production are assimilated Forward integration can increase brand visibility	There may be unnecessary duplication of employee or management roles There can be a culture clash between the two firms that have merged Possibly little expertise in running the new firm results in inefficiencies The price paid for the new firm may take a long time to recoup
Horizontal integration	The rapid increase of market share Reductions in the cost per unit due to receiving more beneficial terms for bulk purchases Reduces competition Existing knowledge of the industry means the merger is more likely to be successful The firm may gain new knowledge or expertise	Unit costs may increase for example due to unnecessary duplication of management roles There can be a culture clash between the two firms that have merged