Internal expansion involves a normal increase in business resulting from increased demand for products and services, achieved without acquisition of preexisting firms. Some companies expand internally by undertaking new product research to expand their total market, or by attempting to obtain a greater share of a given market through advertising and other promotional activities. Marketing can also be expanded into new geographical areas.
External expansion is the bringing together of two or more firms under common control by acquisition. Referred to as business combinations, these combined operations may be integrated, or each firm may be left to operate intact.
Four advantages of business combinations as compared to internal expansion are:
Management is provided with an established operating unit with its own experienced personnel,
regular suppliers, productive facilities and distribution channels.
Expanding by combination does not create new competition.
Permits rapid diversification into new markets.
Income tax benefits.
In an asset acquisition, the firm must acquire 100% of the assets of the other firm, while in a stock acquisition, a firm may gain control by purchasing 50% or more of the voting stock. Also, in a stock acquisition, formal negotiations with the target’s management can sometimes be avoided. Further, in a stock acquisition, there might be advantages in keeping the firms as separate legal entities such as for tax purposes.
10. Does the merger increase or decrease expected earnings performance of the acquiring institution?
From a financial and shareholder perspective, the price paid for a firm is hard to justify if earnings per
share declines. When this happens, the acquisition is considered dilutive. Conversely, if the earnings
per share increases as a result of the acquisition, it is referred to as an accretive acquisition. 11. Under the parent company concept, the...
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