Business Expansion

The growth of firms can be accomplished in two ways.

Internal (or autonomous) growth involving the expansion of the existing firm. It can be seen as a natural outcome of business success but punishes the unsuccessful. The profitable firm is able to finance expansion by re-investing profits.  Moreover with a record of success it will be relatively easy for a firm to obtain additional loan or equity finance. Supporters of market system see this as one of the great virtues. Financial and real resources are easily acquired by those with a proven record of success, with additional resources the firm can grow.

Internal growth is a slow process but it can take place without disturbing the organisational structure. This is organic growth which is easy to manage and to absorb.

External Growth involves the acquisition of other firms by merger or take-over.  The distinction between the two is frequently blurred but merger frequently implies an element of voluntary agreement whereas a take-over implies that a predator firm swallows up another firm. Public limited companies are always open to take-over since there are no restrictions on the transfer of shares within the company. This vulnerability is increased if shareholders are dissatisfied with the performance of the company if it is undercapitalised. A complete merger results in the creation of a new company and an exchange of shares. More common is the purchase of one company of a controlling interest in another, with both remaining legally separate.

Re-arrange the information in order to provide definitions for the different types of merger

Mergers are categorised as:

Horizontal –

Vertical –

Lateral –

 Conglomerate –

• mergers involving firms of a diverse nature.
• a merger of firms using similar techniques to produce related but not identical products.
• a merger of firms at a different stage in the chain of production. The acquisition of a firm at an earlier stage is known as backward integration; if it is at a later stage the acquisition is known as forward integration.
• a merger of firms at the same stage of producing a product.

An increasingly important category that should be added is the international merger to produce a multinational company.

The major advantage of external acquisition over internal growth is that it results in an instant expansion of the firm. Not only does it acquire existing plant and equipment, it also acquires a labour force, expertise, products, brand names and patents. Conversely, there are often problems of adjustment. The acquisition might not be easy to digest in the short run and this frequently contributes to disappointing results following the merger

Answer the following questions.

1. Identify the different ways that a firm’s growth can be measured.

2. What problems are there in using the different measures of growth?

3. What are the potential benefits of the different types of mergers?