The economics of commercial expansion

Many years ago I read somewhere that far too many British companies were growing by acquisition and merger rather than organically.  Strip away the jargon, and the complaint was that British companies ought to grow by recruiting more staff rather than by buying up other companies or by merging with other companies.

It is common for British companies to buy a controlling stake in another company, although I am not sure that it is common for two companies to merge.

Suppose two companies - A and B - compete in the same market.  Suppose also that as company A increases its market share, so company B finds itself struggling.  The directors of company A now have a choice.  They may either make a bid to take control of company B, or they may continue to grow their own company organically.

In the latter case, it is possible that company B will eventually go out of business, in which case its workers will be made redundant.  On the other hand, if company A takes control of company B, then it is probable that many of those jobs could be saved.  I say probable because it is perhaps unlikely that there would be no redundancies at company B following the takeover.

In case readers think that I am recommending takeovers as being preferable to organic growth, let me be clear that I am not.  I am merely observing that takeovers have at least one point in their favour.

My personal view is that takeovers are extremely risky, and are best avoided.  For example, I remember once reading about a successful businessman who bought a controlling stake in what appeared to be a successful company, only to find that it was in fact barely making money.  He and his family narrowly avoided becoming homeless as a result.

If you run a company, then you can seek to expand it on the basis of you knowing its strengths and weaknesses.  By contrast, if you buy another company, then you are expanding your business empire on the basis of your limited knowledge of a company run by someone else.  Surely that is a situation fraught with danger, and therefore best avoided.