The recent crisis of the company Grifols, following a devastating report by Gotham City Research, has once again brought to the fore the issue of the effects of high debt: 9 billion according to the company, and much more according to Gotham. This large debt has its origin in the desire to be much larger, which has led to a series of acquisitions, largely financed with external resources. It is true that larger size generally brings competitive advantages, although smaller size is not always synonymous with lower profitability.
In general, size is more important the more undifferentiated the product is. For example, in the iron and steel sector, the products are fundamentally commodities. Due to this, Celsa also had a desire to grow, and like Grifols, it made a series of acquisitions financed with debt. It accumulated such a mass of debt that it made the company unviable, and the family that owned it ended up having to hand over the company to its creditors. Based on the cases of Grifols and Celsa, we ask ourselves: is it advisable to grow at any price?
At the opposite extreme we have the case of the Inditex Group, which has grown spectacularly since its founding, but practically without debt. Another similar case is Mercadona, today the leader in distribution in Spain, and which has needed very little from the banks to finance its impressive expansion. The high cash flows of these businesses have allowed us to continue reinvesting in growth, leaving aside the enormous risks of growing with such high levels of leverage.
Another way to grow without having to take on large debt is through mergers. This is the intelligent strategy followed by Sol Daurella, president of Cobega, Coca-Cola concessionaire in Catalonia. Daurella reached an agreement with the rest of the Coca-Cola franchisees in Spain to create the company Coca-Cola Iberian Partners.
But it didn't stop there. He saw the possibility of creating a pan-European company, reaching agreements with important Coca-Cola franchisees on the continent. In this way the company Coca-Cola European Partners was founded. The most recent step has been the acquisition of the company Amatil Limited (CCL), bottlers and distributors of beverages and coffee in the Asia-Pacific region. The company has been renamed Coca-Cola Europacific Partners and is the largest Coca-Cola bottler in the world and one of the leading companies in the consumer sector. All of this has been achieved without the need to incur disproportionate debt.
By way of conclusion: growing is important and confers relevant competitive advantages, although you can be profitable without being very large. In any case, it is not good to grow with excessive leverage. A prudent balance between own and external resources, or a strategy based on mergers, are the two most recommended ways to grow.
