Take-over and Merger

Take-overs and mergers are means towards achieving large size. These, together with the raising of funds on the Stock Exchange, are external methods of expansion. ‘Internal’ expansion, via plough-back of profits, is generally thought to be more important to the growth process. For example, it has been found that in the period 1949–53,(1) 85 per cent of expansion was accounted for by internal expansion. For the following period, 1954–61, acquisitions paid for in cash and by shares accounted for 26 per cent of the growth of public quoted companies. (2) For the United States, internal development is also responsible for the major extent of growth. (3) However, the distinction between internal and external expansion is not altogether clear-cut. Cause and effect in the process cannot be sharply distinguished. An amalgamation between two companies may enhance subsequent growth. Any improved performance, following amalgamation, is neither purely internal nor external but mixed in character. While it may be true that overall expansion is more frequently achieved via internal development, nevertheless external means are very important. A single transaction, involving a take-over, may raise the whole level of subsequent growth because the asset mix is now more appropriate. Technically the enhanced growth may be classed as internal, because it has been achieved through plough-back of improved profits following the transaction. In practice, without the take-over this improvement may not have come about. Thus it is likely that figures apportioning expansion between ‘internal’ and ‘external’ understate the importance of mergers and take-overs. Even if the percentage attributable to external development were actually smaller than is in fact the case, take-overs and mergers would still be important in the growth process for reasons which will become clear later.