What is 'Inorganic Growth'
Inorganic growth arises from mergers or takeovers rather than an increase in the company's own business activity. Firms that choose to grow inorganically can gain access to new markets through successful mergers and acquisitions. Inorganic growth is seen as a faster way for a company to grow when compared with organic growth.
BREAKING DOWN 'Inorganic Growth'One of the most important measures of performance for fundamental analysts is growth, especially in sales. Sales growth can arise for myriad reasons including promotions, new product lines and improved customer service. These are all things that companies can do to grow sales using internal, or organic, measures. Growth in organic sales is often referred to as comparable sales or same-store-sales for retail outlets. In other words, these sales are not the product of buying another company or opening new stores. In this way, organic sales may be are a better indication of company performance. A company may have positive sales growth due to acquisitions, while same-store-sales growth is declining due to lower traffic. Analysts research organic sales by analyzing inorganic sales growth.
There are two ways for human beings to keep our heads warm. We can grow hair, or we can put on a hat. It takes a while to grow hair, but we create it ourselves. We do not have to pay money for hair; the body grows hair naturally. The hair is equivalent to organic growth, and a hat is equivalent to inorganic growth. Hair doesn't cost anything, but it takes a while to grow. Those people that don't grow hair fast may be better off buying a hat or a wig if it's cold outside. Likewise, it may be easier for some companies to buy a fast-growing company. Indeed, some companies use acquisitions as the foundation of their growth strategy with the expectation that year-on-year growth is expected to decline. In other words, some companies are losing their hair, and inorganic growth vehicles help to manage the loss.
Inorganic Growth Vehicles and Challenges
Firms can choose to grow inorganically in several ways including mergers, acquisitions, and in the case of retail or branch organizations, new store/branch openings. Mergers are challenging from an integration perspective. Acquisitions can be accretive to earnings, but the implementation of the technology or knowledge acquired can take time. In other words, pulling value out of mergers and acquisitions is harder than taking credit for sales. Costs in the form of restructuring charges can greatly increase expenses. The purchase price of the acquisition can also be prohibitive for some firms. Finally, new stores in profitable locations is good for business. Indeed, new stores generally have much higher growth rates; however when new stores are placed in locations that cannibalize sales and/or don't have enough traffic to support those stores, they can be a drag on sales.