The commitment to the external development of companies
Structural changes in companies: The commitment to external development
To facilitate the understanding of subsequent publications and as an introduction, we will focus on the concept and implications of external development of a company or group of companies such as option for promoting business growth.
As a growth policy, companies can choose to promote their internal development or bet on external development through the acquisition, participation, association or control of a company, companies or assets of other companies, extending their current businesses or entering new ones.
This type of operations involves structural and size changes in one or several companies, transforming its organizational and economic structure, and is generally known by its acronym in English M&A Mergers and Acquisitions).
Companies tend to bet on external development instead of internal development for economic reasons since the operations listed above allow them to reduce costs (through the integration of complementary production or commercial processes…). Obtaining new resources and capabilities, replacing or complementing the management team or, for example, obtaining tax benefits.
There are also other reasons closely linked to economics, since in many cases what is sought is to enter a certain market, industry or country with strong entry barriers< /strong>, a reduction in the level of competition, etc.
Advantages of external growth
The advantages of external growth could be summarized as follows:
- It is a faster and safer form of growth, as it allows immediate availability of new investments.
- It allows to achieve an increase in market power if mergers or acquisitions take place between direct rivals.
- It is a system that offers greater financing possibilities for growth.
Types of external development
Companies generally resort to the following external development operations to obtain the much-desired business growth: p>
- Company mergers: Two or more independent companies are integrated into a single one by means of the block transfer of their assets and the attribution to the partners of the companies that are extinguished of shares, participations or shares of the resulting company in such a way that at least one of the members disappears.
- Acquisition of a company: That is, the purchase and sale of packages or the entire share capital between two or more companies, without implying the disappearance of the legal personality of the parties.
- Cooperation or alliances between companies: It is an intermediate formula; the companies work together establishing links and relationships between them, but without the loss of legal personality of any of the participants, which maintain their legal and operational independence (can be materialized through Joint Venture contracts, analyzed in previous publications).
Depending on the type of relationship or integration established between the companies, they can be classified:
- Horizontal Integration: Companies are competitors among themselves and belong to the same industry
- Vertical Integration: Companies are located in different phases of the process of exploitation or production of a product or service.
- Conglomerate Integration: Companies have activities that are very different from each other, that is, they are not directly competitors nor do they carry out different activities necessary to satisfy a specific need.
Disadvantages of external growth
Once we have analyzed the concept of external development, its types and advantages, we must make a brief paragraph on the disadvantages of external growth:
- In many cases they represent an excessively high acquisition cost due to the valuation of the intangible assets of companies.
- They also tend to involve the purchase of unnecessary assets that go in the “pack”.
- Other times, the restructuring cost of the resulting company jeopardizes the efficiency of the operation.
- In this type of process, important integration problems of two different organizations usually arise.
To prevent this type of difficulties inherent in external business growth operations from ending up hindering it, it is recommended to have a good strategic plan and a team of advisers who help the member companies to anticipate, face or channel this type of inconvenience.