External growth is when a business or a company increases its profits through mergers and acquisition rather than its operation. The main goal is to bring the external finance into the company and achieve greater market share. External growth allows the company to expand quickly, but it is also associated with a number of problems; for example, when companies are merged, creating a unifying culture is usually hard.
A merger occurs, when two companies combine after an agreement between the directors and the shareholders of both companies. Also called takeover, an acquisition occurs when more than 50 percent shares of a particular company have been bought by another company, thus giving it full control.
External growth provides the company with different benefits including increased profits, increased market share, new ideas, eliminates competition and economies of scale gains. Also, the new business may reduce the number of employees to increase efficiency, hence boosting profits.
There are also problems associated with growth that a company should be prepared to face prior to seeking external growth. The managers of both companies may fail to agree on the best way to run the company. Difference in goals and objectives can also be quite challenging. The process of merging and acquisition can be quite costly.