Business growth: Mergers and Takeovers

What are the reasons for growth of firms?

• Economies of scale, as a firm grows unit production costs will fall

• Gaining market share, if a firm has a large market share it may be able to raise prices

• To reduce risk, firms will diversify into new markets and products so they don’t have to rely on one product

What are the two method of growth?

• Internal growth

• External growth

What is internal growth?

When a firm expands using its own resources. 

What are the two types of internal growth?

• Organic growth

• Diversification

What is organic growth?

When the firm expands by selling more of its existing products to existing markets.

What is diversification?

When a firm branches into a new market with new products. 

What is external growth?

When a firm uses another firm to grow. 

What are the two types of external growth?

• Merger 

• Take-over/acquisition

What is a merger?

The joining together of two businesses, with the consent of both parties involved. 

What is a take-over?

The purchase of one business by another, can be done with or without the consent of the company. 

What is integration/amalgamation?

When two or more business are brought together to become one.

What is horizontal integration?

When two firms in the same industry and at the same stage of production amalgamate. 

What is vertical integration?

When two firms at different stages of production in the same industry amalgamate. 

What are the two types of vertical integration?

• Vertical forwards

• Vertical backwards 

What is conglomerate integration?

Involves the amalgamation of firms in completely different industries.

What are the benefits of growth?

• Economies of scale

• gaining market share, benefits of a monopoly

• to reduce risk, by branching into new markets 

What are the problems of growth?

• Financing growth, firms may not have enough retained profit 

• diseconomies of scale, e.g. communication problems

• problems associated with monopolies 

What is an example of horizontal integration?

Sports direct purchases of Jack wills and Fraser, where a larger retailer acquired smaller retailers. 

What are the advantages of horizontal integration?

• Marketing economies of scale, if the firm that has been acquired already has an established brand 

What are the disadvantages of horizontal integration?

• All the problems of monopoly power 

• diseconomies of scale 

What is an example of forwards and backwards vertical integration?

Backwards: IKEA owns and operates forests in Romania to secure its wood supply

Forwards: Netflix produces its own original content which is then distributed through its platform. 

What is an example of conglomerate integration?

Amazon and Whole foods, brought together its online retail with a physical grocery store chain.