External growth: mergers and takeovers

External growth (also called inorganic growth) happens when a business grows by joining with another business, rather than by expanding on its own. Instead of winning new customers one at a time, it gains them all at once by combining with a business that already has them.

Mergers and takeovers

A merger is an agreement between two businesses to unite as one new company. Both sets of owners agree to pool the businesses and share ownership of the new company. For example, two small garden centre chains might merge into one larger chain, with the original owners holding shares in the new business.

A takeover happens when one business gains control of another by buying enough of its shares. The buyer now controls the target business, even if it keeps its own name. A takeover is friendly when the target's owners and managers agree to it, and hostile when they do not, so the buyer has to persuade shareholders to sell anyway.

Advantages

• Speed — external growth can be far quicker than organic growth, because the customers, staff, factories and reputation already exist.
• Market share — buying a rival instantly adds its sales to yours, which can give a bigger share of the market and more influence over prices.
• Less competition — combining two rivals removes a competitor and can mean shared costs, such as one delivery fleet instead of two.

Drawbacks

• Expense — buying another business can cost a great deal, and a hostile takeover may mean offering more than the shares are really worth.
• Duplication — two head offices, two warehouses or two managers doing the same job waste money, and removing the extra roles often means job losses.
• Integration problems — staff may have different ways of working, pay, systems and cultures, which can lead to poor communication, low motivation and customers leaving.

External growth is fast and can boost market share, but it is expensive and risky to make work.