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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. 
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.
(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. 
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.
Burswood Property Trust, Annual Report 1995.
Mercantile Mutual Announces Takeover Offer for Pacific
Mutual Australia @
, 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.



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