Page 20 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

CHAPTER TEN

EXERCISE 1

Briefing notes on acquisition v organic growth and synergies

Prepared by: Senior Manager
For the attention of: Randal Edwards, Novak’s Director of Finance

Subject: ACQUISITION v ORGANIC GROWTH

Introduction

Marcia Conelli is concerned that Novak has slipped from sixth to seventh in the global rankings of
pharmaceutical companies. She is keen to discuss growth options for Novak at the next Board
meeting. The two most common methods by which a company can grow are acquisition and
organic growth.

Acquisition and organic growth – definitions

Acquisition is when one company takes over another. Novak has used this strategy many times in
the past (including three times in the last year).

Organic growth is when a company sets up a new business from scratch. Novak has also expanded
in this way many times over the years.

The relative advantages and disadvantages of the two methods are presented below.

Advantages of acquisition (disadvantages of organic growth)

Acquisition generally leads to quicker growth, since the new business is already set up and fully
functioning. This is a particularly important issue in the pharmaceutical industry given how long it
takes to research and test new products before they can be brought to market.

After an acquisition, the integration of two businesses can lead to an exchange of ideas and
methods which can help to make both businesses more efficient.

Also, economies of scale can be generated after an acquisition. In the pharmaceutical industry,
economies of scale can be significant (we can see from the given costings for Mintac that the

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