5 reasons why corporates go for inorganic growth

Most of the companies look to grow organically. However, increasingly companies are opting for inorganic growth as well. They try to acquire companies in order to expand their businesses. Inorganic growth might be expensive. Also, the due diligence which is needed for inorganic growth is also immense. There is always a risk in order that you might value the business richly and it will actually increase your debt. However, still, the advantages of inorganic growth are plenty. It can no longer be ignored as well. There are quite a few reasons why companies go for inorganic growth. We will today share with you 5 such reasons as to why incorporates often go for inorganic growth.

1. Expanding into new verticals

Each and every industry is changing safely. Moreover, industries are expanding vertically as well as horizontally. It is not easy for each and every company to set up a new unit in order to handle newer verticals as well. Also, it will take a significant amount of time in order to turn around that subsidiary as well. Till then, it will be a drag on the balance sheet of the main company. That is why, whenever corporates are looking to expand into new verticals, they often go for acquisitions as well as mergers. With the help of these acquisitions, they are able to instantly expand into newer verticals. They are able to also expand their balance sheet significantly as well. Moreover, if the companies have the assets which can be utilized by the parent company, the efficiencies increase as well. This will ensure that the profit margin also increases significantly.

2. Getting businesses at cheaper valuations

Many times, when there is a downturn in a certain industry, the businesses are rolling cheaper valuations. Therefore, corporates often think about buying them a cheaper valuation. When they are able to buy them a cheaper valuation, they cannot only increase the profits but also when the up cycle resumes, the value of the businesses increases significantly. As a result, their balance sheet is strengthened as well. With the look to exit from the businesses 6 to 7 years down the line, they will be able to make a hefty return as well. This is another reason why companies often go for inorganic growth.

3. Avoiding competition

In many of the cases, company buyout other companies in order to avoid competition. When they buyout the competitors, they will be able to easily dominate the market. This will mean that lesser competition is present and also they will be able to make the amount of money as well.

4. Offering a wide range of products to their customers

When they are acquiring the company in the same field, the product offerings, as well as the service offerings, increase significantly. As a result, it will become easier for them to offer better value products to the customers. Moreover, they can integrate the products with their own as well. This will result in the increase in turnover from the same set of customers as well. Moreover, they will be able to offer the entire book of services to their customers. This will ensure that the customer retention is also on the higher side. As a result, they are able to expand their business significantly.

5. Economies of scale

Many times, due to economies of scale as well they buyout newer companies. This ensures that they are able to reduce the cost of providing products and services. When this cost is reduced, they will be more competitive. When they are more competitive, they will be able to get a larger market share as well. Again, due to economies of scale, they will be able to offer better services to the consumers at lower cost. This will, in turn, mean that they are able to easily increase their profit margins are significant. Moreover, with the help of increased cash flow, they will be able to reduce their debt over a period of time. This is another reason why they go for acquisitions.
The more acquisitions which you undertake, the better will be economies of scale. They will be able to reduce their cost significantly. As a result, they will be able to gain traction among newer clients. Thus, they will be able to offer better products at lower prices with the help of economies of scale. This will mean that the investors are also happy which will help them in raising more capital. With more capital, they will be able to invest in research and development which will be for the better of their products. Thus, with the help of acquisitions, they are able to continuously improve as well. When they improve on a consistent basis, it will be easier for them to beat the competition.
As you can see, there are quite a few reasons why incorporates often go for acquisitions. These days, debt is available at the lower interest as well. As a result, they are able to access capital at a cheaper rate as well. This will ensure that the cost of capital has come down and they are able to get a good amount of return on the capital which they deploy as well. Moreover, in this area of lower interest rates, it is easier to gain positive return since the cost of capital is on the lower side. They will be able to expand significantly by going for inorganic growth which ensures that they are able to get into a dominant position in the market quite easily.