Question

List several reasons (and give real life examples for each) a company may choose external growth by a merger over internal growth

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Answer 1

Meaning of Merger

As the name suggests, merger means merging two or more companies. Two different companies become a single company by merging all their assets and liabilities into one. Their individual identity also become a single identity.

Meaning of Internal Growth

Internally growing means a company pushes its operations/sales and production. It means a company might change its strategies to grow internally. It can implement internal changes to grow.

Reasons a Company can choose Merger Over Internal Growth:

1. More Assets: A single company has got assets which are sufficient for its production but when two companies merge the additional assets would turn higher profitiablity and higher production as well.

2. The Goodwill Impact: Sometimes a company having less goodwill or good brand image merges with a company with higher goodwill. Higher the goodwill, higher the sales and higher the profits would turn good fortunes for the company having lesser goodwill.

3. Double Share capital: As everything gets doubles, the capital of a company also get doubled with the merger.

4. Turn Losses In to Profits: A company suffering losses also may seek a company having profit. This would help the company with losses to recover from losses.

5. New Personal with New Ideas: When a merger takes place, everything a company has gets merged. Employees are the main source a company has for its growth. With merger, new employees would come up with new ideas thus creativity would also help both the merged companies to gain profits by exchanging ideas.

6. Control over Competition: When there would be two companies, they can compete with their competitors with better ideas, more assets, and better strategies.

A Real Life Example:

Proctor & Gamble Merged with Gillette in the year 2005. P&G bought Gillette in $ 57 billion. After this deal Proctor & Gamble became world's largest consumer product company having worth $ 60.7 billions. After the merger the financial strength of the company rose because the revenue got tripled. According to a report the net sales of Proctor & Gamble rose to 27% and reached $ 18.34 billion.