It is the belief that virtually all companies, particularly publicly owned companies, should be managed to create as much wealth as possible. This means that a company’s resources should be handled in a way to achieve maximum profit for all parties concerned. In most instances, to achieve this goal, some sort of growth strategy is in order.
Organic Growth vs Inorganic Growth
Organic growth is pretty much just like it sounds — growth generated from within. This means increased output and more sales, both of which boost revenue, with the company relying on its own resources to achieve this growth. There are many ways a company can grow organically; these include offering new products and/or services, a reallocation of resources and finding less expensive ways to provide the same products and services, among others. This type of growth is simple to measure — that is done by comparing revenue to previous years. Organic growth is the opposite of inorganic growth, which is explained below.
Inorganic growth is a result of a company using mergers and acquisitions (M&A) and/or takeovers to increase revenue. An M&A is when two companies consolidate using various forms of financial transactions. Like virtually every other type of business dealing, there are multiple flavors of M&As, and rarely are two cases exactly alike. Understand that “mergers” and “acquisitions” have different meanings, but these two terms are grouped together as an umbrella for any number of business transactions.
A merger is when two companies combine, which forms a new firm, while an acquisition is when one company purchases another company outright. In addition to standard mergers and acquisitions, there are other types of M&As, including consolidations, tender offers, acquisition of assets and management acquisitions, to name a few.
The Case for Inorganic Growth
The general consensus is that inorganic growth is a faster way for a company to grow than organic growth. The mantra in virtually every company is to gain more market share. Now, there are ways to do this by growing organically — by improving your product line, either by adding new products and/or features, altering your pricing structure, or expanding other things, like your customer service reach, for example. All of these are totally valid, if not entirely typical, solutions for any company to grow, create wealth and add market share.
However, not everything can be handled merely by growing organically. In some situations, an inorganic growth spurt is what is needed to reach those same goals — larger market share and created wealth for the stakeholders and/or shareholders. In those instances, inorganic growth may be exactly what is needed.
The Benefits of Inorganic Growth
One of the biggest benefits of inorganic growth is the high probability of success. Adding a new product, service, competing in a new geographical area, or gaining a large group of new customers quickly are all great reasons to go this route. For example, if Company A acquires (or merges with) Company B, the resulting company will have a larger customer base as well as being more competitive in the sector.
Another strong benefit of inorganic growth is the ability to bring new products and/or services to the market quickly. Taking over or combining with a company that has an existing product or service that complements yours, or taking over a company that you’re competing with, will allow your company to have a product in the marketplace faster than if you’ve grown it organically.
On the flip side, there are some things you should watch out for when growing inorganically. These include the following:
- Overpaying for the target company
- Misjudging synergies
- Lax due diligence
- Corporate culture differences
Inorganic Growth Strategies
Mergers and acquisitions are the most commonly used method of inorganic growth. When two companies combine, or when one takes over another, that is considered an M&A and a legitimate strategy for inorganic growth. In addition, opening a new location for your business is another. Often used by retailers and restaurants, opening a new location is a method of inorganic growth at first, at least until the new location becomes part of the regular business, at which point its sales are considered organic growth.
Below are some methods companies deploy to spur inorganic growth:
- Combining with a similar company to grow market share
- Acquiring another company whose products, services and/or customer base a company wishes to have
- Merging two dissimilar companies (known as a conglomerate merger), thereby creating a combination of two totally unrelated businesses
- Opening in a new location, in order to gain customers in a geographical area in which a company is not represented
An Essential Tool for Inorganic Growth
There definitely are risks when it comes to M&As, and of course performing due diligence is mandatory in every type of these transactions. However, one risk that is certain: Any type of corporate transaction needs access to a virtual data room (VDR). A VDR (sometimes referred to as a “deal room”) is a secure online location used for document storage and distribution, which allows all parties to review, share and update documentation connected with the transaction. VDRs are commonly used during all phases of M&As, IPOs and other corporate development activities.
A VDR provider should be a trusted partner in these types of transactions and supply the appropriate tools required. These tools include secure access, enterprise-level encryption, multiple layers of security and user-friendly admin controls compatible with multiple operating systems. Caplinked, an industry leader in the VDR space, provides all these tools and more and can help save time and money in any of these corporate transactions. Visit Caplinked today to see how your business deal can be made far easier.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.