Build or Buy: Corporate Growth Strategies

Modern capitalism is predicated on economic growth.  Firms that choose to go public, do so knowing that by becoming a publicly listed company they will be expected to deliver business growth to the market usually on a quarterly basis. Listed companies are therefore under constant pressure to show signs of revenue growth to help maintain and build their share price that is a reflection of the market's expectation of their future profits.

In general, growth can either being achieved through building organically, i.e. creating new revenue streams or incremental revenues from existing activities or through buying another company's business.

After a period of relatively little M&A activity for the past five years, the past 6-12 months has seen a resurgence among European telco and media companies in mergers and takeovers - the majoriy of which have been non-contested takeovers, e.g. ntl (Virgin Mobile); Telefonica (O2); and BT (Radianz, Albacom and Infonet).

So why has M&A suddenly come back into fashion and there has been little in the way of contested bids?

In most cases, it probably reflects an improvement in sector business confidence and the ability of telco and media firms to raise funds in the capital markets. From a position a few years earlier when many established firms had overstretched themselves with speculative acquisitions of dot com start-ups (worried about being left behind in the online world) as 'traditional' cash generative businesses, they can now look at making investments in a second wave of start-up buinesses.

In the Media sector, the acquiring companies have been looking to expand outside of their traditional businesses such as Associated Newspapers recent purchases of relatively small start-up online busineses such as villarenters.com and simplyswitch.com.

In some cases such as Carphone Warehouse's acquisition of the AOL UK business, the deal makes sense from providing sufficient economies from an enlarged customer base or immediately acquiring a ready made customer base that otherwise would take several years to build with substantial marketing costs.

But at a time when there appears to be so much technology-led change taking place in the sector potentially opening up new consumer markets, there appears to be little corporate apetitite for large scale product launches.

If the frequently referred to statistic of 50 per cent of all mergers failing to deliver against their stated goals or grow revenues beyond the two previously separate businesses is applied, it makes for a period of industry consolidation and slower growth at a time when most commentators expect the demand for communications services to increase.

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