Custom «Growing a Company by Internal Acquisition» Essay Paper Sample
Two major ways in which a company can grow
A company which intends to enhance growth may choose between two options: Organic growth and Inorganic growth. The choice of strategy to be used is highly dependent on the objectives of the firm and the availability of resources.
Organic growth signifies a situation in which a company enhances growth through increasing the turnover of the existing business. It is at times referred to as internally sought growth. This may involve sourcing for new customers and expanding the production capacity of the existing business. In essence, it encompasses the utilization of existing resources to grow the business. A firm for example may decide to implement a plan aimed at increasing the volume of sales within its area of operation or expand to other areas. A perfect example of organic growth was exhibited by Proctor & Gamble in 2006. The company decided to concentrate on market growth rather than in the formation of mergers and acquisitions. The result was increased sales which in turn contributed to an increase in the firm's profitability. Unlike inorganic growth, organic growth allows flexibility and provides a workable strategy for medium-sized businesses.
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Inorganic growth denotes a strategy in which a business grows when one or more companies are united. It is highly preferred by businesses that wish to expand their businesses yet they are not willing to invest in new companies which are often tedious to set up and are highly unpredictable due to the difficulty in establishing new markets. Organic growth may be undertaken in the form of mergers and takeovers. In the case of a merger, two firms make an accord to work together as one. In this respect, they can share the resources available in the company to develop the activities that are considered profitable for the organizations. Mergers also enhance economies of scale resulting from the pooling of resources and large scale operations which are bound to cut on costs. A takeover occurs when a company purchases at least 51% of another company's shares. Accordingly, the company with the largest stake in the company takes control over the running of the other company. This company makes major decisions such as the business activities to be undertaken or maintained by the group. An example of inorganic growth was exhibited by Pfizer Inc. which purchased the Wyeth in 2009. This happened in the form of a cash and stock merger where Wyeth shareholders received 0.985 of Pfizer Inc common stock. They would also get $33.00 of every share that they owned with Wyeth, exclusive of interest. Inorganic growth encompasses two types of integrations as firms join their activities with an aim of increasing market share and profitability. These are known as the horizontal and vertical integration.
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This strategy occurs where two firms in the same production level come together in the form of a merger or acquisition. There are several advantages associated with this kind of arrangement. To begin with, businesses operate in the same sector and therefore they are likely to integrate their activities without encountering complexities. Secondly, such an association provides a larger customer base for the newly established company which in turn assures the company's profitability. Thirdly, the companies enjoy economies of scale through shared costs and production of large quantities. The companies could also get rid of excessive resources and thus reduce maintenance costs. For example, the companies may sell some machines and have production done in one factory. They could also move into one office thus reducing operational costs. An example of horizontal integration is where two companies involved in the production of electronics join to form a single company.
Vertical integration occurs in a situation where businesses at different production stages are joined. An example is where a company supplying particular goods joins with a company that is concerned with the production of such goods. Vertical integration can either be forward integration or backward integration. In forward integration, a company joins with another company that is at a higher production level. For example, a manufacturing company may join with a distributing company thus creating forward integration. This association will benefit the manufacturing company because will be in a position to control the distribution of goods and hence reduce costs incurred by the business. On the other hand, backward integration occurs where a company joins another company that is on a lower production level. An example is where a transport company joins with a company that manufactures the goods that it supplies. The company benefits by influencing the type of goods to be produced in order to meet the needs of customers as dictated by the market.
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How the acquisition of Berendsen provided a good opportunity for the Davis Service Group.
The importance of resource availability and the existence of opportunities are inevitable as far as business growth is concerned. Davis Service Group's acquisition of Berendsen provided a perfect opportunity for the company to expand its market and thereby increase its profitability. Davis Service Group took over Berendsen at a time when it was experiencing serious financial problems; an opportunity that made the acquisition of Berendsen easy for the company. Davis Service Group joined with Berendsen through a takeover; which gave Davis Service Group an upper hand in controlling the activities and an opportunity to introduce the best systems at Berendsen. This put the acquired company's systems at par with Sunlight's; given that Davis Service Group had already established proven management systems. Acquiring Berendsen was a calculated step in Davis Service Group's intention to enter new markets.
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Berendsen had already established a customer base and Davis Service Group could take advantage of the business connections that Berendsen had established with customers and suppliers. This is in particular reference to the fact that Berendsen was a market leader in its area of operation which minimized the threat of competition. The idea was more strategic than setting a rival company in Europe; which would have meant a fresh start for Davis Service Group. Berendsen was therefore a perfect opportunity to enter foreign markets without incurring huge costs in advertising and efforts aimed at acquiring customers in a new market. It also meant that Davis Service Group did not have to set up new premises in Denmark, Norway, Sweden, Poland, the Netherlands and Germany where Berendsen operated. The international presence of Berendsen further meant that Davis Service Group had a perfect opportunity to grow their business in the seven countries that Berendsen was already operating in.
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In terms of resources, the fact that Berendsen was already established made it easy for Davis Service Group to expand. This meant that the necessary resources required for running the business such as machines, garments, offices and staff among other resources were already available. Financial resources were easily accessible for Davis Service thus making the takeover exercise efficient. Sunlight was already doing well and a bid to fund its expansion endeavors was well received by the shareholders and financial institutions which were confident about the business' potential profitability. Accordingly, the company raised £150 through a rights issue and came up with the remaining £425 by borrowing from banks.
Aspects of European Union markets that encouraged horizontal growth and organic growth at Davis Service Group
Davis Service Group chose horizontal growth followed by organic growth in anticipation of growth in the textile maintenance business attributed to Sunlight and Berendsen. There are various factors in the European Union markets that triggered these strategies.
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Horizontal growth of the Davis Service Group
The establishment of Sunlight as a new business in foreign countries is an endeavor that would have been exceedingly expensive for Davis Service Group. The existence of Berendsen therefore provided an excellent opportunity for the company to expand its operations internationally. The company would be better placed in terms of competitiveness, given the increased size of its market. It is notable that Berendsen was a market leader in the countries that it operated in. Davis Service Group was aware of this and therefore took advantage of the fact that Berendsen was going through financial difficulty. Through this merger, Davis Service Group ventured in markets that could have taken them a long period of time to penetrate if they had started fresh subsidiaries.
Horizontal growth would improve the company's productivity through the realization of economies of scale. Notably, two companies operating at the same level of production are capable of pooling resources and undertaking large-scale transactions and thus reduce on costs. An example would be in the ingredients used in the maintenance of linen. The merger between Davis Service Group could easily allow for huge purchases of such ingredients which would in turn attract considerable discounts from manufacturers. The two companies were therefore justified in opting for horizontal growth.
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Horizontal growth involves less complexity in terms of management due to the fact that companies operate in the same area of specialization that they were used to. This means that there is no need for the management to acquire new skills or to hire managers who are well conversant with the new field of operation as with other types of growth strategies. In the case of Sunlight and Berendsen for example, both businesses were involved in textile management and therefore only an exchange of ideas was necessary to keep the business running. The managers in both companies were conversant with the processes and thus there was no need to acquire new knowledge.
Organic as opposed to inorganic growth
Inorganic growth is very effective in a company's development prospects. The strategy is however very expensive and therefore requires huge capital outlays. It also requires the company to find lucrative prospects that would be beneficial to the company if a merger or acquisition occurs. The absence of such prospects may prompt a company to consider organic growth. In the case of Sunlight and Berendsen for example, there are few companies in the Eastern European countries that would be suitable for takeover. They comprise of companies that were previously owned by governments such that they are poorly equipped or have not perfected the business of renting textiles.
The choice of organic growth by Davis Services Group can also be attributed to the potential growth resulting from the expanding market. It is notable that there is a rapid growth in the trade and living standards in the EU. As a result, a large number of companies are being opened and these could elevate the demand for uniforms. Davis Service Group is also favored by the new EU legislation that requires industrial workers to wear protective clothing in the course of their work. This insinuates that the company will have a constant supply of contracts as the EU market continues to develop. This kind of market growth is bound to eliminate the idea of inorganic growth since the profitability of the company is potentially high. The company may therefore disregard the idea of takeovers by opting to derive their profits from the existing market.
Recommendations for expansion in new areas of the globe
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If the company were to venture into new global markets, I would recommend them to consider the Asian market. This is a fast growing market and the Asian Tigers namely: Hong Kong, South Korea, Singapore and Taiwan have been declared the next "big thing" in the global economy.
A major factor to consider is the existence of a potential market for the Group's services. The Asian economy is growing at an alarming rate and new businesses that venture here are bound to be successful in the long-run. Furthermore, international companies are increasingly setting up subsidiaries here with an intention of tapping the growing market. Davis Service Group should therefore expand into this part of the globe before it becomes too difficult to enter the market once the economy is full-blown.
Despite the perceived benefits of investing in the Asian market, there are a few factors that could discourage such an endeavor. To begin with, the venture may be too expensive for the company, given the huge financial outlays that may be required for the establishment of a firm in Asia. The other factor is that the culture in Asia is very different from that of the UK and EU. Accordingly, the buying patterns and customer demands may not match what the company is used to in its present locations. Language may also pose a barrier in communication despite the fact that English is being highly advocated in Asia to facilitate international business. Finally, the issue of currency could lead to fluctuations in profitability due to the volatility of exchange rates. This may be discouraging especially where the exchange rates lead to a negative effect on the company's profitability.