- Merger
- A merger is when two formerly separate firms combine to become a single firm, operating from then on under common ownership.
- Acquisition
- An acquisition is when one firm purchases another, which may carry on operating under its former company name.
Ways a firm can grow
Can you name the four ways a firm can grow?
The first is building; the other three are buying, told apart by where the other firm sits in the supply chain.
Organic growth is a firm expanding from within, by opening new sites, hiring staff or launching products, paid for from profits or borrowing.
Can you think of an example?
A bakery chain opens ten new shops with its own profits. It keeps full control, but the growth is slow, since each shop has to be found, fitted out and staffed.
Horizontal integration is a merger or acquisition joining two firms at the same stage of production in the same industry.
Can you think of an example?
The bakery chain buys a rival bakery chain. It gains the rival's shops and customers at once, a larger market share, and a lower price per sack of flour.
Vertical integration is a merger of firms operating at different levels within an industry's supply chain, backward towards suppliers or forward towards customers.
Can you think of an example?
Backward vertical integration: the bakery chain buys the flour mill that supplies it. Forward vertical integration: it buys the sandwich shops that sell its bread.
Conglomerate integration is a merger between firms that are involved in totally unrelated business activities.
Can you think of an example?
The bakery chain buys a chain of gyms. The two share no customers or inputs, but a bad year for bread need not be a bad year for the whole firm.