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Acquisitive (or “external”/“inorganic”) growth occurs when a business increases its market share, customer base, revenues and (hopefully) profits through acquiring or merging with other companies. 

Acquisition: when one business purchases another, either through mutual consent or through a hostile takeover.

Merger: when multiple businesses voluntarily and permanently combine to form one business.

Businesses acquire or merge with other businesses for a variety of reasons, many of which relate to the synergies that can arise. However, a less permanent solution may be to engage in alliances, partnerships or joint ventures, which can give rise to similar benefits but also enable parties to retain some autonomy.

Alliance / partnership: when businesses or individuals with complementary capabilities/resources cooperate in order to advance their mutual interests. For example, a mobile phone manufacturer may bundle its products with those of complementary businesses (perhaps Internet service providers or mobile game creators), in order to increase sales and brand awareness for all parties involved. However, if the parties all participate in the decision-making process, reaching an efficient consensus on decisions may be difficult if the motives or objectives of the parties involved do not align.

Joint venture: when two or more businesses agree to pool their resources and work together on a specific task or project, such as the development or launch of a product or service. The parties to a joint venture typically share the costs, risks and rewards. For example, multiple pharmaceutical companies might form a joint venture in order to collaborate on the development and launch of a vaccine, which might involve them agreeing to pool their knowledge and resources, share the cost of research and development, and split any future profits. 

Synergies: this refers to the benefits that can result from the interaction between two or more businesses. Examples of synergies include: the sharing of resources to reduce costs, leveraging greater purchasing power to negotiate more favourable prices from suppliers, and sharing knowledge/expertise to improve product or service offerings. Synergies can ensure that the value generated as a result of one or more businesses combining or working together, is greater than the total value that those business could generate separately. 

Below are some of the advantages of acquiring or merging with other businesses:

✓ Rapid expansion: acquiring another business can facilitate rapid expansion, as the acquirer will essentially have “grown” as soon as the deal completes.

✓ Access to expertise and complementary resources: acquiring another business can enable the acquirer to boost its own capabilities, for example by providing access to physical resources (e.g. factories, machinery, vehicles, offices and retail stores), financial resources, technical resources, complementary skills, or networks and contacts that could enable the acquirer to circumvent barriers to entry and compete more effectively.

✓ Geographical expansion: acquiring another business can enable the acquirer to access and benefit from that other business’ experience and expertise. For example, if you acquire a business located in another jurisdiction, that business may well have an in-depth understanding of its local market (not to mention invaluable supply chain relationships with, for instance, manufacturers, suppliers, distributors and retailers), which could help you to immediately and effectively expand into that new market, as opposed to spending ample time and money trying to learn about the market from afar. 

✓ Expansion of product/services range: an acquisition may enable a business to diversify its range of products or services. For example, if a company that manufactures handbags acquires a company that sells belts and wallets, post-acquisition it will have a broader range of products to sell to its customer base (and the customer base of the business acquired). Selling a greater range of products can help to attract new customers and generate additional sales from existing customers, which can help to increase revenue. 

✓ Economies of scale: a newly combined organisation with larger operations could likely benefit from increased economies of scale, which could help to reduce its costs. For example, if the new larger entity buys supplies in greater quantities, it will likely be able to negotiate more favourable prices with suppliers. It may also be able to cut costs by, for instance, making duplicate employees redundant (e.g. if the acquirer and the target both have a CEO, CFO, COO etc.), selling or ceasing to lease duplicate real estate (e.g. if the acquirer and the target both have head offices, the newly combined company may only need one of the buildings), better utilise existing resources (e.g. the newly combined entity might be able to manufacturing the new, broader range of products in a way that ensures all factories are at full capacity), and so on. If an acquisition involves Integrating into the supply chain (e.g. if the acquirer purchases a particular company in the supply chain), this could also help to reduce external costs. 

✓ Reputation: acquiring a business can also help to influence others’ perception of the acquirer, potentially helping it to gain external legitimacy in the eyes of suppliers, lenders and customers who might not have previously come across or trusted it (for example, if the acquirer previously operated in a different jurisdiction or industry). 

✓ Competition: acquiring or merging with other businesses can also reduce direct competition in the market, which can increase a business’ market share and purchasing power, and lessen its need to reduce prices and invest in marketing in order to compete. Note however that if a deal could significantly lessen competition in a particular market, it may well be blocked by a competition regulator.

Economies of scale: this refers to the cost advantage that arises when fixed costs remain the same but production or output (e.g. the size of an order) increases, and/or where costs decrease because output has increased. For example, the cost of professionally printing 100 handbooks is much higher per handbook than if I were to print 2,000 handbooks in one go, as in the latter case, the fixed costs of setting up the print job would be spread across more units. In such circumstances, the supplier is usually willing to pass on a proportion of these cost savings, in turn reducing my input costs. Moreover, suppliers might also be willing to make less profit per unit if more units are ordered; this incentivises customers to spend more overall, in the knowledge that doing so will reduce the cost of each unit (thus enabling them to achieve economies of scale). When retailers offer deals such as “buy two, get one free”, this is essentially what’s happening; you, the customer, are being offered the opportunity to benefit from economies of scale if you are willing to buy more units in the first place.

There are however issues that can arise when businesses combine:

✗ Expensive: it can be very costly to acquire other businesses, especially if the target company’s shareholders demand a premium (i.e. payment of a higher price than the market value of those shares), not to mention the professional services fees involved in getting a deal over the line (think lawyers carrying out due diligence and drafting and negotiating documents, accountants and tax advisers contributing to the financial aspects of deals, and so on). 

✗ Time consuming: it can be very time consuming to complete and acquisition, as due diligence may involve reviewing tens (or even hundreds) of thousands of documents, whilst dozens (or hundreds) or documents might need to be drafted, negotiated and signed. 

✗ Complexity: it can be difficult to effectively integrate two separate businesses, both operationally and culturally. It can also be more challenging to maintain effective internal communication as an organisation becomes larger and more complex.

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