Mergers

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Many firms start small and will grow into large companies or even multi-national corporations
- E.g. Amazon and Dell both started in entrepreneurs' garages
Business growth can be separated into two broad categories, internal and external business growth

Internal growth (organic growth) is driven by expansion using resources from inside the business, such as reinvested profits
It is usually achieved by:
- Gaining a greater market share
- Product or market diversification
- Opening new outlets
- International expansion (new markets)
- Investing in new technology or production machinery

External business growth (inorganic growth) is when a business expands by joining with or buying other businesses rather than growing on its own
External growth takes place in the form of a merger or a takeover
- A merger occurs when two or more companies combine to form a new company
  - The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
- A takeover occurs when one company purchases another company, often against its will
  - The acquiring company buys a controlling stake in the target company's shares (>50%) and gains control of its operations

Firms will often grow organically to the point where they are in a financial position to integrate with others
- Integration speeds up growth but also creates new challenges
Integration can happen in one of three ways

Vertical integration refers to the merger or takeover of another firm in the supply chain or different stage of the production process
- Forward vertical integration involves a merger with or takeover of a firm further forward in the supply chain
  - E.g. A dairy farmer merges with an ice cream manufacturer
- Backward vertical integration involves a merger with or takeover of a firm further backwards in the supply chain
  - E.g. An ice cream retailer takes over an ice cream manufacturer

Advantages	Disadvantages
Cuts production costs by removing middlemen Lower costs increase competitiveness Greater supply chain control and more reliable access to raw materials Better control over raw material quality Forward integration increases profit and brand visibility	Diseconomies of scale (e.g. duplicate management roles) Culture clash between merged firms Lack of experience in new business area may reduce efficiency High acquisition cost may take time to recover

Horizontal integration is the merger or takeover of a firm at the same stage of the production process
- E.g. An ice cream manufacturer merges with another ice cream manufacturer

Advantages	Disadvantages
Rapid market share growth Lower unit costs from economies of scale Less competition Shared industry knowledge improves success chances May gain new expertise	Diseconomies of scale (e.g. duplicate roles) Culture clash between merged firms

Conglomerate integration occurs when a firm merges with or takes over another company in an unrelated industry—one that operates in a completely different market
It is a type of diversification strategy that helps firms spread risk by expanding into different sectors, so that poor performance in one market may be offset by success in another

Advantages	Disadvantages
Reduces overall risk of business failure Increased size and connections in new industries opens up new opportunities for growth Parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate	Possible lack of expertise in new products/industries Diseconomies of scale can quickly develop Usually results in job losses Worker dissatisfaction due to unhappiness at the takeover can reduce productivity

How do businesses grow?