In this video were going to cover inorganic methods of business growth with a focus on
the advantages and disadvantages of mergers and takeovers.
There are two types of business growth, organic and inorganic.
Organic growth is when a business expands by its own efforts and business operations.
Whereas inorganic growth is growth that is achieved as a result of mergers and takeovers.
This video is solely focusing on inorganic growth but if you want to learn about organic
growth head over to our video organic growth explained.
So the business has decided to take an inorganic approach to growth but what is the difference
between mergers and takeovers?
Mergers are where two or more companies come together to form one new company.
The two companies no longer exist as single business as they join forces to move forward
as a single new entity, rather than remain separately owned and operated.
Mergers bring growth to the businesses involved as they are now able to combine their assets
to become larger, hopefully more efficient and competitive in the market.
One of the most well known mergers recently was between two American food companies Kraft
and Heinz to form a new company Kraft Heinz in 2015.
This merger made Kraft Heinz the 5th largest food and beverage company in the world.
Takeovers however are different to mergers as this is when a one business decides to
purchase and own another business.
With this purchase they now own land, buildings, technology intellectual property.
The key difference is that a new company is not being formed one business is taking the
assets of the other, usually smaller business.
A great example of a takeover is when Facebook (Now Meta) bought Instagram in 2012 for 1
billion dollars.
This meant that Instagram was now a brand with Facebooks portfolio and that all Instagram's
assets including the brand name and technology was under facebooks control.
Facebook also tried the same thing with Snapchat but their offer was rejected.
There are different types or methods in which a business can merge with, or take over another
business.
The first is Backward vertical integration
this occurs when a business takes control of another business earlier in the supply
chain.
In other words, a backwards vertically integrated business controls some aspect of the supply
chain, which means that it not only distributes the
product it sells, it also can be involved in the creation and development of that product
before it reaches the consumer.
An example of backward vertical integration could be a tyre company such as Michelin completing
a takeover of a producer of rubber that could be used in the manufacturing of Michelin’s
tyres.
This would mean that the business owned a company producing the raw the materials used
in the manufacturing of their tires.
The benefit to Michelin of taking over the rubber producer would be that they had greater
control further back in their supply chain, which in turn should reduce unit costs and
improve their access to the rubber used in the manufacturing of tyres.
Another type of vertical integration is forward vertical integration.
This occurs when one business takes control of another that operates at a later stage
in the supply chain, closer to the end consumer.
One clear example of forward integration is Amazon’s takeover of Whole foods.
Amazon was a small player in the grocery business but after acquiring 460 retail outlets in
the takeover of wholefoods they now have the ability to sell groceries directly to the
consumer face to face moving them one step closer to where the majority of people do
their food shopping.
Probably the most common type of merger or takeover is one that sees horizonal integration
this is when businesses come together either through a merger or takeover that operate
in the same industry at the same stage in the supply chain.
Basically before the merger or takeover these two businesses were likely competitors.
The Kraft and Heinz merger to create Kraft Heinz is a perfect example of horizontal integration
as they were two competitors in the same food and beverage Industry and were at the same
stage in the supply chain.
Kraft and Heinz when from competing in this market to being able to pool their resources
and become one of the largest food and beverage companies in the world no longer competing
for the attention of the same type of customer.
One of the key reasons for inorganic growth is that business growth can be achieved quicker
inorganically than in comparison to growing organically.
But there are a variety of advantages and disadvantages that need to be considered when
it comes to mergers and takeovers as a way of achieving inorganic growth.
The first advantage is that once the merger or takeover is complete the business will
see an immediate increase in revenue, this is due to the sales of both businesses now
being combined.
Secondly the business can take advantage of economies of scale leading to lower costs.
A business's size is related to whether it can achieve an economy of scale.
Larger companies have the ability to produce more and spread the cost of production over
a larger amount of goods which in turn reduces the unit cost of those goods.
Competition can be reduced which in turn can increase market share very quickly.
Imagine if Asda completed a merger with Sainsbury’s.
This merger would mean one less competitor to deal with but would also increase their
market share from around 17% each to a combined 34% taking them from the second and third
largest UK supermarket separately to the number one by a considerable margin as Tesco has
around a 20% market share.
This is something Asda or Sainsbury’s could as quickly organically but through a merger
it would possible and once approved would happen relatively quickly.
However this is where regulators could step in.
A disadvantages of attempting mergers and takeovers is that regulators have the ability
to block mergers and takeovers that would not be in the public interest in terms of
competition, choice price.
This actually happened when Sainsbury’s did actually attempt to merge with Asda in
2019.
The merger was blocked by The Competition and Markets Authority as they said the merger
would lessen competition, raise prices at the supermarket petrol stations and lead to
longer checkout queues.
However Sainsbury’s and Asda argued it would have cut their costs which would have in fact
lowered prices.
Despite this it was blocked and shows that regulators do have the ability to limit inorganic
growth.
Another disadvantage is that takeovers have a cost to acquire the other business.
This is an upfront cost that the business needs to pay.
Facebook paid $1 billion for Instagram and Google $1.65 billion for YouTube.
This is an upfront cost to the business with no guarantee that he takeover will even be
successful.
However these can pay off as YouTube is now generating over $19 billion dollars in revenue
annually which has resulted in a considerable return on Goggle’s initial purchase price.
Finally, integrating two different corporate cultures and management systems can be a major
disadvantage when mergers or takeovers happen.
Companies have their own identities and ways of doing things and this can be extremely
hard to navigate when a business mergers or is taken over.
All in all inorganic growth is definitely a beneficial way of growing rapidly as some
of the largest companies on the planet have grown via mergers or takeovers.
Thanks for watching the video we really do appreciate you watching to the end and if
you are new to the channel don’t forget to give the video a thumbs up and subscribe
for more weekly business videos!