Critically evaluate the benefits and disadvantages of expansion via Essay

Critically evaluate the benefits and disadvantages of expansion via organic growth versus expansion via acquisition. using real - Essay Example This global business related news is encouraging in the context of financial downturn of the year 2008, still casting its shadow on the global growth of large businesses. Luypaert & Huyghebaert (2007) attempt a statistical analysis of the expansion via acquisition strategy becoming a trend, as in 2005 only, 29,585 acquisitions got materialised. Companies prefer to grow and expand through acquisitions rather than organically because it is the quicker way of growth relatively to internal growth as the aimed company is well positioned with its production, distribution and customer base. It also minimises the risk of investing for the increasing growth of the company. Otherwise also, expansion via acquisition could prove to be cost-efficient way out relatively to organic growth, especially when the replacement cost of assets is higher than the concurrent worth of the aimed assets. Another benefit of the expansion via acquisition is that in comparison to organic growth, it can be acquired by paying through the stock as well. It can be a way-out for companies facing cash-crunch or for those companies already deficient in debt power. Literature reveals that during flourishing stock market behaviour, bidding companies prefer to pay for the acquisition through stock. Irrespective of this fact, expansion via organic growth and via acquisitions is mutually inclusive investment decision for a firm; it can be an added advantage to choose any of the expansion methods rather than selecting a single alternative. Before taking a decision to go either for internal expansion or expansion via acquisition, thorough research needs to be made to gather industry impact and aggregate market variables for opting out external expansion. There might be the possibility that firm size may artificially hold the impact of industry concentration whereas the market-to-book ratio may reveal the comfort of bidding firms to reward aimed shareholders with stock if stock markets are flourishing. Ind ustry features are crucial factors like the potential for economies of scale, industry concentration, sales growth and deregulation, and aggregate market variables, like historical volume of merger and acquisition, stock prices, GDP growth and the output spread (Luypaert & Huyghebaert, 2007). In a mutually inclusive relationship between internal growth and expansion via acquisition for making investment, a company may opt for growth via expansion additionally to organic or internal growth. Financially sound companies with enough investment possibilities would prefer to practice both options of growth for leveraging from competitive advantage as early as possible. In case, firms face cash crunch, they might prefer an alternative of the two. Strategies for both kinds of growth options need not to be necessarily related. Statistical research on the connection between external and internal growth is limited with complicated outcomes. Hay and Liu, as cited by Luypaert & Huyghebaert (2007 ) evaluate M&A in the UK across 1971–1989 and find that M&A and organic expansion are supportive to each other. On the opposite side, Dickerson et al., as cited by Luypaert & Huyghebaert (2007), employing data on UK listed companies in manufacturing during 1948–1970 and 1975–1990, note that the connection between organic growth and the possibility of expansion through acquisition is surely negative, which underscores that these growth strategies are to be used alternatively (Luypaert & Huygh