Growing your Business through Mergers or Acqusitions

A business can growth through internal expansion (existing operations, additional equity or borrowings) or external expansion (merger or acquisition).

During a downturn in the economic cycle, businesses which have a history of strong financial control will be in a stronger position to take advantage of opportunities to grow through external growth strategies.

Firstly a quick look at the advantages of internal growth:

1. Acquire assets specific to the business.
2. Avoid creditors or minority shareholders of an acquired business.
3. Avoid costly negotiations and the problems of valuation.
4. No requirement for reporting to the relevant authorities.

This topic is widely covered throughout the Growing your Business section of bean-talk

The advantages of External growth:

1. Growth is not limited by internal resources.
2. It need not cause a drain on working capital.
3. It may reduce the number of competitors.
4. The acquisition can include the managerial skills, customers, goodwill, patents, and other intangible assets of the acquired business.

5. There may be tax and accounting elements which could be available.

2 main types of external growth strategies and potential outcomes are:

Horizontal combinations competitors and substitutes:

1. The number of competing units is reduced.
2. The combination may capture a larger proportion of the total market and at the same time reduce distribution costs relative to competitors.
3. The combination can improve the ratio of working capital to sales.
4. Added economies may result from the elimination of duplication in facilities, management personnel, purchasing practices, and improved utilization of fixed assets.

Vertical integration of suppliers and/or customers in the production process:

1. Reduction in buying and selling costs between integrated businesses.
2. Opportunity to reduce materials handling costs.
3. Improved coordination of production and inventory scheduling from one stage of production to the next.
4. Reduces the need for work in progress buffers, thus improving working capital.
   Marketing and technological capability may be improved.
5. Can increase entry barriers which may discourage new competition.

< back