The Pros and Cons of inorganic growth explained

Inorganic growth is a type of corporate growth in which one company takes over or merges with another. Here we show you what advantages and disadvantages this can have, and what opportunities and risks arise for the companies involved.

Inorganic growth of a business: What is it?

Inorganic growth is the growth of a company that does not result from its own business activity, but from mergers with or acquisitions of other companies.

A characteristic of this type of growth is that it is accompanied by a rapid and strong growth spurt and provides the new company with competitive advantages that it would not be able to achieve on its own, or only at great expense.

Types of inorganic growth

Inorganic growth can be divided into the following types:

• Mergers: Two companies merge into a single company and both contribute their resources and know-how, making the resulting company larger and giving it a competitive advantage
• Takeovers: A company takes over another company, either by buying it outright or acquiring a majority stake, making the acquired company part of the group

Organic growth vs. inorganic growth

Organic growth arises from the regular business activity of a company, i.e. from the sale of products or services. If business is good, high turnover is generated, which in the best case leads to an increase in turnover and thus to growth.

If a company expands its product or service catalogue or enters new markets, this is also referred to as organic growth, because no other companies are involved in this type of expansion.

Organic and inorganic growth examples

An IT group specialises in cyber security and server maintenance. In the near future, it would also like to make cloud computing available to its customers. For this, it needs a data centre and its own servers.

If it invests in the acquisition of a suitable property where a server data centre can be established, this is called organic growth. In this case, the group alone participates in the growth.

On the other hand, if the group acquires 51% or more of the shares in a company that has a suitable data centre and server hardware, this is referred to as inorganic growth. By acquiring the majority of voting rights, the company becomes part of the IT group.

Inorganic growth: Advantages and disadvantages

Advantages

The biggest advantage of inorganic growth is the rapid growth spurt. Through the acquisition of another company or through a merger, a competitive advantage is created. The new company gets more know-how, resources and a larger customer base.

In addition, its total capital grows, which gives it a better chance of being able to finance larger investments immediately via bank loans - provided that the takeover or merger does not have any negative effects on the credit score.

Disadvantages

The disadvantage of inorganic growth is that it is also associated with numerous risks. If, for example, it is not entirely clear before a takeover how the debts of the acquired company will affect the group as a whole, this can have a negative impact on its credit score.

In addition, a merger or acquisition can also create the risk that the company does not develop as expected, revenues stagnate and growth falls short of expectations. This can quickly become a financial risk.

Inorganic growth involves a lot of work in advance, because it is necessary to analyse exactly how a company will benefit from a merger or takeover.

This process is accompanied by high costs.

What are the best inorganic growth methods for a business?

Whether a takeover or a merger is better for a company cannot be answered in a general way. It always depends on the individual case. The merger is open to all companies if they find a suitable partner.

A takeover only occurs when a larger company has enough capital available to acquire a voting majority in a smaller company.

In the case of a merger, a contract agrees exactly what both companies will contribute to the new company. In the case of a takeover, the smaller company has little or no say.

Inorganic growth makes sense especially when two companies are active in a highly competitive market. The takeover or merger reduces competition and at the same time increases market share, from which both companies benefit.