Chapter 1 - F Flashcards
Company growth and mergers and acquisitions
What is organic growth?
Where a company develops and expands through increase of sales, revenue and through its own current businesses, activities, and effort rather than through mergers and acquisitions.
Organic growth can only be achieved when?
A business has the financial resources to pay for the expansion.
Give 8 examples why a business would want to grow:
- Increase consumer income.
- Ready availability of finance.
- Low interest rates.
- Buoyant markets.
- Opportunities for product development.
- Export oppurtunities.
- Economies of scale through lower operating costs.
- Oppurtunity of increased revenue, profits and shareholder value.
Current growth trends show organic growth to be more favourable than non-organic growth. Give one positive and one negative reason for this approach?
- Positive: Less expensive and forerces a company to build a strong base for further growth.
- Negative: Heavy demands on management as innovation will be essential to support this type of growth.
Give 4 organic growth drivers:
- Success and progress can be measured more accurately as figures are not distorted by mergers or aquisitions.
- More profitable with better investment return.
- Demonstrates long-term commitment to a business by building it through internal resources.
- Management focus can be solely on growth as there is no distraction from merger or acquisition structural changes.
In the insurance market, when it comes to organic growth, it must be handled correctly by an insurance manager as it is unique in comparison with other sectors. Explain why this is?
Due to the nature of insurance business, namely the lag between business going on the books and the emergence of the true pattern of claims, the true profitability of the business being written is disguised. A insurance manager will need a true understanding of long-term profitability, although will be under pressure to manage the business under a short-term basis in order to give rapid returns to investors.
Having a large market share of a profitable class of business is a great asset to a company as it will serve as an important platform for developing what?
Organic growth.
When there is a company merger or acquisition, this can lead to lower productivity. Why?
Employees will expect staff reductions and cost savings which introduces uncertainty among staff.
Organic growth has many benefits. List 5:
- Less risk than external growth.
- Can be financed through internal funds.
- Builds on a business’ existing strengths.
- Allows a business to grow at a more sensible rate.
- Can be more economic compared with acquisitions.
Give 5 reasons a company may not want to grow organically?
- Takes more time.
- Requires employees who are trained and can handle growth.
- Resources will be needed such as premises and equipment.
- Extensive marketing will be needed.
- Takes longer than buying an existing book of business, which may not meet investors’ expectations.
Where strategy is to grow based on organic expansion, the growth of the organisation (staff, IT, facilities) should match the growth in premium where possible. Why?
So the business has the sufficient income to disperse its fixed overheads.
What is non-organic growth?
Where a company merges with or acquires another company (Mergers and acquisitions).
An acquisition is?
Where one company gains control of another through the purchase of majority shareholds.
A merger can only happen when?
Two companies agree to join forces on a strategic basis.
M&As can be divided into two different types of integration, name both:
Horizontal and vertigal.
