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COPYRIGHT 2006 SourceMedia, Inc.
There is consensus that financial markets reward corporate growth. Notably, however, different strategies to achieve growth are not evaluated equally. Corporate growth is commonly characterized as a dichotomy. There are "organic growth" and "non-organic" (external) growth and this distinction is critical. Organic growth is usually defined as a company's growth rate excluding any scale increases from takeovers, acquisitions, or mergers. Growth of this type is also referred to as a company's core growth. Organic growth is generated, for example, by selling more product (services as well) to current customers, selling product to new customers, or selling product at a higher price. Firms relying on organic growth derive most of their expansion internally, by enhancing current customer relationships and building new relationships. Most importantly, organic growth is received with great favor by the financial markets; non-organic is far less favored, if at all.
What is the problem with non-organic growth?
Just as there are those who swear by organic fruits and vegetables, the financial markets will pay a premium for organic corporate growth. Those markets, however, will not pay a premium for non-organic growth generated by takeovers, acquisitions, and mergers. Bruner (2005), in his book, Deals from Hell, argues that not all non-organic deals are failures, "M&A [mergers and acquisitions] is no money-pump. But neither is it a loser's game". There is, however, compelling evidence that transactions of this type are risky, very risky. Consider acquisitions. These transactions have very different outcomes for the acquiring firm as compared to the firm that is acquired. For the acquired firm, the average...
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