Reasons For Business Growth

There are many reasons why a company may aim to achieve growth rather than remain at the same size. Firms which grow benefit from the economies of scale which eventually lead to a greater profit.

Firms aim to maximise their profit as this is the ultimate goal for all firms. Economies of scale give greater technical efficiency, spreading fixed costs, bulk buying, agglomeration and so on. That is, technical efficiency generally increases as the size of the firm increases, MR = MC and profit is maximised. For example, in the mission statement of National Foods Limited (NFL), it aims to achieve "optimal levels of productivity and profitability whilst at the same time ensuring that shareholders' investments are safeguarded through ethical and prudent business practices." ie. maximum technical efficiency. Public companies (the larger ones) also have greater access to capital through share floats and subsequent rights issues that they can offer.

This is a benefit of being a large, public company. For example, NFL states, as one of their aims, to maximise returns to shareholders through capital growth and dividends. This is just one example of how important access to capital is. Finance from the public is also preferred to finance in the form of a loan, from a bank as repayments are not legally essential. This is something that only a large firm can do. Large firms have a degree of security and stability about them. Generally, there is more security in your job and work environment in a grown, established company rather than in small companies. For example, one of NFL's aims is to achieve "operations which continue to be carried out in a responsible manner within an environment that provides safe working conditions for all employees." Employees whose jobs are not under threat tend to work more efficiently without delays. NFL also aims to achieve job satisfaction by its employees and rewards them appropriately for effort and intiative. Finally, large companies are well known and with their status can exert a lot of power and influence on people.

Power and respect is desired by almost everyone and thus firms aim to achieve this. NFL aims to achieve leadership in the industries in which its buinesses operate. An example of this kind of business is the yoghurt industry in which one of NFL's company, National Dairies, has recently gained the right to manufacture yoghurt in Australia under the Yoplait brand name. Previously, National Dairies was operating at a loss because no one wanted to buy yoghurt under a name they hadn't heard of but now National Dairies is becoming a market leader in all market sectors because Yoplait is providing a strong "umbrella" brand to the business. With this comes access to international research and product development programs from the owner of the Yoplait brand. Thus influence and brand names can lead to other benefits from having power. One 1995/1996 objective was to achieve status as a world competitive producer.

PATHWAYS FOR TAKEOVERS & MERGERS

A takeover occurs when one company secures over 50% of another company.

This can be for several reasons such as the benefits of economies of scale (especially with the sharing of management), greater marketing power and complimentary products. An example of a lateral integration is Mercantile Mutual Financial Services Limited (MM) currently taking over Pacific Mutual Australia Limited (PMA). MM is offering the shareholders of PMA a cash offer of $2.30 for each ordinary share that they own. In addition, another fully franked dividend of $0.10 per share will be offered by PMA once the offer is declared unconditional. One condition is that MM must receive 90% or more acceptance for PMA's shares.

This offer values PMA at $98 million. The board of management of PMA have recommended acceptance to the bid in the absence of a higher offer. MM's aim in acquiring PMA is obviously to expand its company. Whilst it may be considered horizontal growth it can also be argued that this is lateral growth since both companies, whilst offering some similar services, are not entirely the same. MM is a "leading insurance and financial services group" whilst PMA is an investment management and life company. One of the reasons MM desires to takeover PMA is for greater access to capital.

PMA is a large, public company with almost $2 billion in funds under their management including the Armstrong Jones property trusts. The acquisition of PMA will extend MM's operations into listed property trusts. As PMA also has a share of the New Zealand market in its fund management, MM will be expanding its market by acquiring PMA. Additional growth will occur in their life and funds management businesses. Another example of inorganic company growth is a merger between more than one company. An example of this is was the 1995 SBS IAMA Limited integration of eight independent IAMA businesses and one publibly listed SBS Rural Ltd into one national rural distribution and retail organisation. This integration was spread across nine different companies.

It could be argued that it was a horizontal integration as eight of them were very similar in levels of production but it is more likely seen to be a lateral integration. Benefits from this include more access to capital, complimentary (rural) products, a much larger brand name (for power marketing purposes) and for some related fixed costs such as management and marketing. The merging of SBS IAMA was considered successful to the point that it was referred to as a "capital raising" activity rather than just a merger.

FORMS OF BUSINESS GROWTH

(increased market share; product development; growth of market from external sources; profit growth) Steady growth in profits, assets and income can be used as one form of measurement of business growth.

In the 1994/1995 Financial year, Burswood Property Trust (Burswood)'s operating revenue increased by 11.7% from the previous year to $429.1 million. In 1986 operating revenue was $43 million in the first 6 months of trading. Its net income (after tax) increased 19.6% to $52.6 million. Distribution (dividends) increased 27% to 15.5 cents per share. However Burswood attributes this growth in profits to increasing demand from a market which Burswood itself, is gaining a greater share of. This increase in demand and the fact that Burswood has an exclusive casino licence, means that growth of the company has been and will continue to be attributed to growth in demand and the market. The external sources contributing to growth in the market are the geographical proximity of Perth, strong economic growth in Asia and an increase in demand from growing middle class populations for "the quality gaming experience, resort facilities and service which are unique to Burswood". Burswood's share in the Asian market has grown significantly in the past decade and looks set to continue with this growth, despite increase in competition as well.

Burswood is not unlike a monopoly here in WA. Whilst other casinos are opening up elsewhere in the country and the region, none are opening in Perth. Burswood also believes it has further developed or rather improved its products and services which have helped prompt an increase in demand. Newly introduced games in the main gaming hall, huge casino "African Safari" promotions and new player incentive programs have all increased demand from patrons.

Recent awards for tourism and service excellence give the casino great marketing power and a good reputation which future patrons may base their visits upon. Another example of expansion through profit growth is PMA. In the financial year ending 30 June 1995, PMA recorded increases in profit after tax (+3%), earnings per share (+1%) and dividend to shareholders per share (+23%) from the previous financial year. This followed continous growth in all three areas since 1992. At the same time, the amount of shareholder's funds had increased as well from more than $50 million in 1992 to more than $80 million in 1995.

Debts had been reduced to naught and gross funds under management had increased from $4.05 billion to $4.3 billion. These excellent results won them a "Golden Target" award for investor relations, adding prestige to their name. This shows that as the company grew in size, worth and power, demand for their services increased as well.

SOURCES OF FINANCE FOR BUSINESS GROWTH

There are several ways of raising finance for a company. Determining which method is used to get it, depends on how much finance is needed in the first place and the current net assets of the company, how urgently the finance is needed, whether or not and how long before the money will be payed backed and other factors. Some companies will choose to float some shares in their company as a source of finance. Whilst this is can be useful in that there are no legal obligations for the company to pay back the shareholders, unlike with a loan from a bank, it is really only useful when large sources of finance are needed as marketing of the company is time consuming and expensive as preparation of prospectuses, share brokers and advertising need to be organised and paid for.

However in the case of Hoyts Cinema Ltd, a share float appears to be quite appropriate as they seek to gain around $100 million to fund their expansion. Hoyts is offering 50 million shares at $2.00 each to give the company a market capitalisation of around $440 million. Profit growth for Hoyts in 1996 has slowed down from 1994-95 when huge box office successes like Forrest Gump and The Lion King raised a lot of revenue for Hoyts. They now plan to hopefully increase their revenue and thus their profit by expanding with 100 new cinema screens around the world. To do this, finance is being raised from this share float. This is not the first time for the Hoyts name, the radio group Hoyts Media and Hoyts Entertainment previously floated in 1987 but fell into receivership later on. That was a different float. However it is posiible for a "second float" to take place in the same company after shareholders have bought their shares. It is still possible for the company to offer more to the public, for extra finance. A new issue of shares is a rights issue and an example of company which has done this is Petroz NL. Petroz is offering a renounceable rights issue of one new ordinary share at $0.65 per share for every two ordinary shares that a shareholder currently owns.

This is being held to raise approximately $42.60 million. As this is an expensive exercise, after costs of marketing have been taken into account, it will actually raise only $41 million. The price of the rights issue is approximately 20% cheaper than the recent trading price of normal Petroz shares. Petroz is seeking to gain extra finance to fund "the continuing appraisal of the reserves and reservoir performance of the Bayu - Undan gas/condensate field"; extensive engineering studies; potential development of two oil fields and funding of an active oil exploration program.

As the level of risk is relatively high, Petroz seeks to fund these activities from existing cash flow, rather than debt. Thus it has chosen to issue a rights issue in place of a loan from a financial institution with the risk that they may not be able to pay it back.

RESOURCES USED

• Burswood Property Trust, Annual Report 1995.
• Mercantile Mutual Announces Takeover Offer for Pacific
• Mutual Australia @ http://www.mercantilemutual.com.au/homepage/news/media5.html , accessed on 27 August 1996.
• Mercantile Mutual, document on "how to deal with... cash offer... for all your ordinary shares in Pacific Mutual Australia Limited", 1996.
• Microsoft Bookshelf '94.
• Microsoft Encarta '95.
• National Foods Limited, Annual Report 1995.
• Pacific BBA Limited, Annual Report 1995.
• Pacific Mutual Australia Limited, Annual Report 1995.
• Parry, G. & Kemp, S. 1994, Pathways in Economics, Tactic Publications, S. Perth. Petroz NL, Prospectus 1996.
• SBS IAMA Limited, Annual Report 1995.