the impact of a merger or takeover on stakeholders

1.3 Size of Business – Business Growth

Objective

To understand the different ways a business can grow, the reasons behind each growth route, and the impact of growth – especially mergers, take‑overs, joint ventures and strategic alliances – on the various stakeholder groups.

Key Definitions

• Growth: An increase in the size, output, market share or profitability of a business.
• Internal (organic) growth: Expansion achieved using the firm’s own resources – e.g. new products, new markets, increased capacity.
• External growth: Expansion achieved by combining with or acquiring other organisations.
• Merger: Two (or more) companies combine to form a new entity, usually on a mutually‑agreed basis.
• Take‑over (acquisition): One company purchases a controlling interest in another, which may continue under its own name or be absorbed.
• Joint venture (JV): Two or more firms create a separate legal entity to pursue a specific objective, sharing risks, profits and control.
• Strategic alliance: A formal cooperation between firms that remain independent but work together on a particular project or market.
• Stakeholder: Any individual or group that can affect or be affected by a business’s actions, objectives and policies.

1. Measurements of Business Size

Cambridge expects candidates to be able to use several quantitative measures when describing the size of a business.

2. Significance of Small and Medium‑Sized Enterprises (SMEs)

• SMEs make up >90 % of firms in most economies and contribute a substantial share of employment.
• Strengths: flexibility, rapid decision‑making, close customer relationships, ability to niche‑market.
• Weaknesses: limited access to finance, smaller economies of scale, vulnerability to economic downturns, reliance on key individuals.
• Understanding the role of SMEs is essential when analysing growth options – many small firms choose internal growth to retain control, while others use external growth (e.g., a family firm selling a minority stake to a larger partner).

3. Types of Growth

3.1 Internal (Organic) Growth

Typical routes and strategic reasons for choosing them:

• Product development – launch new products or improve existing ones (innovation, R&D). Reason: diversify product range, meet changing consumer tastes.
• Market penetration – increase sales of existing products in current markets (price promotions, advertising). Reason: exploit existing brand equity and achieve economies of scale.
• Market development – enter new geographic or demographic markets. Reason: spread risk across regions and tap untapped demand.
• Capacity expansion – add new facilities, increase plant size or improve processes. Reason: meet rising demand without relying on external partners.

Why firms often prefer internal growth:

• Full control and ownership are retained.
• Lower risk of cultural clash.
• Financing can come from retained earnings, reducing dependence on external finance.
• Growth is usually slower, allowing time for careful planning and risk management.

3.2 External Growth – Mergers & Take‑overs

Note on unrelated diversification: While a conglomerate merger can reduce exposure to sector‑specific downturns, it also carries the risk of a lack of managerial expertise in the new industry, possible inefficiencies, and difficulty in achieving synergies.

3.3 Joint Ventures & Strategic Alliances

• Purpose: Share resources, spread risk, gain market entry or access technology without full acquisition.
• Typical structures:
  • Equity‑joint venture – each partner holds shares in a newly created company.
  • Contractual alliance – partners sign a cooperation agreement (e.g., co‑branding, R&D partnership) without creating a separate legal entity.
• Key differences: In a JV the parties own a new entity and share profits/losses; in a strategic alliance they remain independent and the collaboration is limited to the agreed project.

4. Stakeholder Groups Typically Affected

1. Shareholders / Owners
2. Employees
3. Customers
4. Suppliers
5. Creditors / Banks
6. Government & Regulators
7. Local Community

5. Impact of Growth Strategies on Stakeholders

The table summarises likely positive and negative effects for each stakeholder group when a firm pursues internal growth, external growth (mergers/take‑overs) or a joint venture/strategic alliance.

6. Factors Influencing Stakeholder Impact

• Deal structure: Cash purchase, share exchange, or mixed consideration affects shareholders and employees differently.
• Industry context: Highly regulated sectors (e.g., utilities, telecoms) face stricter antitrust scrutiny.
• Integration strategy: Speed, cultural alignment and communication determine employee morale and customer continuity.
• Financing method: Debt‑funded deals raise risk for creditors; equity‑funded deals may dilute existing owners.
• Geographic spread: Cross‑border mergers introduce exchange‑rate risk and additional regulatory hurdles.
• Related vs. unrelated diversification: Conglomerate mergers (unrelated) often struggle to achieve synergies compared with related‑business mergers.

7. Success / Failure Checklist for Growth Strategies

When evaluating whether a growth move is likely to achieve its objectives, consider the following criteria. Each point can be linked back to one or more stakeholder groups.

1. Cultural fit: Compatibility of organisational cultures reduces employee turnover and integration costs.
2. Realistic synergy estimates: Over‑optimistic cost‑saving forecasts can lead to shareholder disappointment.
3. Clear integration plan: Detailed timetable, governance structure and communication strategy protect customers and suppliers.
4. Regulatory clearance: Early engagement with competition authorities avoids costly delays.
5. Financing sustainability: Debt levels must remain within covenant limits to keep creditors confident.
6. Retention of key talent: Incentive packages for critical staff protect knowledge and continuity.
7. Stakeholder communication: Transparent updates for shareholders, employees, customers and the community maintain trust.

8. Illustrative Case Study (Brief)

Scenario: National retailer RetailCo acquires regional competitor ShopLocal in a horizontal, friendly takeover.

1. Shareholders: RetailCo’s investors expect a 12 % rise in earnings per share within 24 months, based on projected £30 m in cost synergies.
2. Employees: 18 % of ShopLocal staff are slated for redundancy as overlapping store locations are merged; the remaining workforce receives a training programme on the new IT system.
3. Customers: The combined chain can offer a broader product range and a unified loyalty scheme, but a two‑week stock‑out occurs during the integration of inventory databases.
4. Suppliers: Existing contracts are renegotiated; some small local suppliers lose business as RetailCo consolidates its supply base, while larger national suppliers gain larger, longer‑term contracts.
5. Creditors: The acquisition is financed 60 % by a revolving credit facility; banks monitor cash‑flow forecasts closely to ensure debt service.
6. Government & Regulators: The Competition Commission imposes a condition that at least 15 % of stores must remain open in designated rural areas to preserve competition.
7. Local Community: RetailCo pledges a £2 m community fund for local sports facilities, offsetting the impact of store closures.

9. Conclusion

Growth can be achieved organically or through external arrangements such as mergers, take‑overs, joint ventures and strategic alliances. Each route offers distinct advantages – speed, market power, risk sharing – but also presents challenges that affect every stakeholder group. A systematic stakeholder impact analysis, together with a realistic assessment of success factors, is essential for making informed strategic decisions and for maximising the long‑term benefits of business growth.