Chapter 18 Unit 5 Q6/7 Expansion Reasons for and methods of expansion 3 main sources of finance Importance of expansion contrast equity and loans for expansion

Grow to survive or increase profits Organic growth: internal financed from reserves/profits Inorganic: acquisitions, mergers or alliances Acquisitions: one firm buys another, buy over 50% of shares Merger: two companies come together as one. More friendly than a takeover

continued Alliance: for specific aim like share skills, technology, market knowledge. Strategic when one or more come together to increase competitive advantage in a market. E.g Aelingus and Oneworld Airlines Cheaper, more opportunities and more capital

Expansion: 1) Horizontally, 2) Vertically, 3) Laterally or by 4) Diversification 1) same line of business e.g two petrol co’s 2) or firms at different production level e.g publishing co merge with printing company 3) related businesses Kerry foods and K ingredients 4) or merge with totally unrelated businesses BA tobacco and Lancome

Reasons for expansion People reasons: personality of managers Defensive reasons: lower cost and guard supplies, guard market share Aggressive reasons: to keep off competition and growth, increase market share

Finance for expansion Long term finance usually: 1 Reserves, 2 Share Capital and 3 Loan capital 1 money saved from last years accounts 2 sell shares outside company or sell more shares instead of dividends to shareholders inside the company 3 fixed rate long term loans (debentures). Bank will want to see plans and accounts and the 3 C’s Character, Capacity, Collateral

Share selling (or Equity) versus getting loans With share selling: you lose control the more you sell, dividends can be lowered by management, dividends are heavily taxed With Loans regular payments that must be paid, conditions but they are very tax deductible can write off interest payments

Expansion good and bad Can lead to unhappy workforce if merger means new people working with them Job losses as company consolidates Costly Merger mightn’t improve the company More power with suppliers etc cos bigger

The importance of Irish Business Expansion At home: Jobs,taxes,survival against bigger international companies, more likely to export when large Expand Abroad: profits come back home. New skills and technology, more competitive

Conclusions and Q’s Types of expansion are?? Organic Versus Inorganic? Merger, Aq, and Alliance?? The ways in which frims can expand horiz….?? Reasons for expansion are..? Finance options why Loan over Equity?? Why important for home and abroad?