Selling Out & Starting Up

by: Jim Roche

This post is an excerpt from an article published Nov. 1, 2010 in the Ottawa Business Journal

We often hear about local high-tech companies being bought, usually by foreign companies. There are inevitably opinions describing this as a loss to the region and to Canada.

But is this really the case? Cisco established itself in Ottawa with the purchase of Skystone. Alcatel-Lucent acquired Newbridge Networks. IBM broadened its footprint in Ottawa by acquiring Cognos. All of these organizations have flourished under the new parent. Other examples include the acquisition of Lumenera by Roper Industries and the purchase of Semiconductor Insights by United Business Media (UBM). Both have grown substantially since their acquisitions.

In these cases, and many others, it could be argued that the acquired company benefited from the buy-out. Moreover, the acquisition created significant wealth for the founders and investors, many of whom went on to help start up or invest in other companies.

So are acquisitions good or bad?  That’s like asking if mothers-in-law are good or bad: it all depends!

Many acquisitions happen because the acquired company wasn’t able to get traction in the market or stumbled. In that case, the acquired company may have been bought for the technology rather than the business as a going concern. In this situation, the local region probably won’t benefit that much. On the other hand, had the company not been acquired it likely would have failed anyway. So, better to be acquired.

Some acquisitions leave most of the local management team in place or allow members to expand their mandate, taking on larger assignments that give them more experience. Not everyone continues to reside in town, but those who do develop a better base of experience and a richer network of contacts to offer to their next employer. The local community certainly reaps the benefits.

While individual acquisitions aren’t necessarily bad for the local economy, we certainly will be in trouble if we don’t foster the creation and growth of new companies.

A recent study by the Ewing Marion Kauffman Foundation showed that in the US between 1977 and 2005 the only net new jobs were created by start-ups. This is counter-intuitive because we expect companies like Google and Apple – high-growth, larger companies that have been around for a few years – to drive job creation. They do, but at the same time, companies like Ford and GM destroy jobs. On average, older companies destroy more jobs (e.g. through layoffs) than they create (e.g. through hiring). Only start-ups create more jobs than they destroy.

What this means for the local economy is that we shouldn’t worry too much about acquisitions as long as we have a healthy start-up environment. It is the start-ups that will drive job creation. The acquisitions will help feed the start-ups with talent and money.

The good news is that there are many exciting start-ups today in Ottawa. These are supported by excellent government assistance schemes like the SR&ED investment tax credits and other directed programs like IRAP. What we lack is availability of angel and venture capital. Last year, VCs invested about half as much per capita as compared to the United States. Without this capital to fuel growth, local start-ups are at a disadvantage compared to their international competitors.

If only we could sell more companies, generating better VC returns and providing more experience and wealth for the founders and other investors!

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