Methods of Expansion: Inorganic Growth

There are three main types of inorganic growth:

1. A strategic business alliance or joint venture
2. A merger
3. A takeover or acquisition

1. Strategic Business Alliance / Joint Venture

• A strategic business alliance or joint venture is when two or more independent businesses agree to work together on a specific goal or project.
• They share resources (such as technology or staff) and expertise for the benefit of both sides.
• However, they remain legally independent and continue to trade under their own names.
• This type of agreement is often temporary and can be ended by either party at any time.

Advantages of a Strategic Alliance / Joint Venture

• It is cost-effective, because both businesses share the costs involved.
• Both businesses can share resources and expertise, so they don't need to invest in new skills or equipment on their own.
• It helps businesses access new markets by using the partner's existing customer base and distribution channels.

Disadvantages of a Strategic Alliance / Joint Venture

• There may be a loss of control, as each business must consult the other when making decisions about the joint venture.
• Profits must be shared between the businesses, which can reduce each company's earnings.
• Decision-making can be slow, because both businesses need to agree before taking action.

2. Merger

• A merger is when two or more businesses join together voluntarily to form a single new legal entity.
• This means they become one company, usually with a new name, and are owned jointly by the shareholders.
• Mergers are often used to combine strengths and reduce competition.

Advantages of a Merger

• Mergers can lead to diversification, which means the business can expand into new products or services. This spreads risk.
• It is a quick way to expand, especially compared to organic growth, which can take longer.
• Costs are reduced because the merged business can benefit from economies of scale (producing on a larger scale reduces cost per unit).
• The merged business can become more efficient by combining expertise, ideas, and technology.

Disadvantages of a Merger

• Redundancies (job losses) can happen when the new business no longer needs two people doing the same job.
• Conflict can arise if the businesses have different ways of working. Staff may find it difficult to adapt to new systems or leadership styles.
• Communication problems can occur, especially if employees are used to different cultures or procedures. This can lead to stress and low morale.

3. Takeover / Acquisition

• A takeover (also called an acquisition) happens when one business buys another by purchasing 51% or more of its shares.
• This gives the buyer control of the company.
• The takeover can be friendly (agreed by both companies) or hostile (if the company being bought resists the sale).
• The company that makes the purchase is called the holding company, and the business it buys becomes a subsidiary. The subsidiary may lose its brand or identity and become part of the holding company.

Advantages of a Takeover / Acquisition

• It allows the business to achieve economies of scale, as combining operations can reduce costs.
• The acquiring business gains access to a new market, increasing its customer base.
• It allows diversification into new products or sectors, which helps reduce risk.
• It provides immediate access to new technologies or products, speeding up innovation and growth.

Disadvantages of a Takeover / Acquisition

• Takeovers are very expensive, and may require borrowing large amounts of money, increasing financial risk.
• Industrial relations problems may occur if employees of the acquired company feel insecure or fear job losses.
• Redundancies are common, especially when there are duplicate roles in the two businesses.
• The acquired company may also lose its independence or identity, especially if it is fully absorbed into the holding company.

Legal Oversight in Ireland

• In Ireland, mergers and acquisitions over a certain size must be approved by the Competition and Consumer Protection Commission (CCPC).
• The CCPC ensures that the deal will not reduce competition or harm consumers. This protects the public interest in large business expansions.