External growth: buying a business instead of building one

1. Edexcel names two forms of external growth, and the sharp difference between them is consent.
   1. Merger: both sets of owners agree to combine, so the two firms become one new business, usually with a new name, a single board and one set of shareholders.
   2. Takeover, also called an acquisition: the buyer purchases enough shares to control the target, and because the target's directors do not have to agree, a takeover can be resisted.

Advantages: what the buyer gets on the day the deal completes

1. Growth is immediate, because the premises, equipment, customers and staff already exist and simply trade under new ownership from completion day, and speed is the real attraction of a takeover.
   1. Customers and market share: the target's buyers become your buyers at once, so revenue rises without waiting for a marketing campaign to take effect.
   2. Brand and reputation: a name shoppers already trust takes years of consistent trading to earn, so buying one is often quicker and cheaper than building one.
   3. Staff and expertise: trained people transfer with the business and bring knowledge the buyer lacks, such as how to run a warehouse network or a delivery app.
2. Buying a rival also removes a competitor from the market, so the combined firm is under less pressure to undercut on price and keeps more of the customers it has just paid for.
3. The larger firm orders stock in greater bulk, so suppliers charge it less per unit and its cost per item falls, which means it can either cut its prices or widen the gap between price and cost.

Disadvantages: the price of the deal and the trouble afterwards

1. Buying a business is expensive, so the money usually comes from heavy borrowing, and the interest has to be paid every month whether the deal works or not.
2. The problems that follow completion are as serious as the problem of paying for it.
   1. Culture clash: the two workforces arrive with different pay rates, shift patterns, software and habits, and staff who resent the new way of working leave or stop trying.
   2. Job cuts: two head offices and two accounts departments do the same work, so redundancies follow, and morale falls among the very employees the buyer wanted.
   3. Overpaying: the buyer judges the target from the outside, so worn-out equipment, lost contracts and unhappy customers only come to light once the money has gone.
3. A combined business can also become too big to manage well, because decisions pass through more layers of managers, so a problem in one shop takes far longer to reach anyone able to fix it.

Judging organic against external growth: what it depends on

1. External growth suits a business that needs speed and has the finance and management capacity to absorb another firm; organic growth suits one that values lower risk, control and a manageable pace.
2. The key question is whether the target genuinely fits, because poor systems, culture or customers can turn the expected benefits into integration costs.
3. Overall, external growth is strongest when speed matters enough to justify the higher financial and integration risk.