To build or not to build: that’s the question
From the perspective of business executives, there are two ways to grow a business: build or buy.
They ask if it is appropriate to build a new business, product or service idea from scratch. Or should the business buy an existing corporation that already offers the desired product or service?
The answer to that question: it depends. Either way, the solution is never simple.
Often times, buying another organization is an expensive way to grow. To begin with, buyers must conduct due diligence, examining the fine details of financial and operational efficiency. They investigate questions like, is the company profitable? Do you have real estate? If not, are you paying too much for a lease? When does the lease end? Is there a union? Is the union friendly or antagonistic? What terms has the union negotiated? Does the business entity have debt? How expensive is the debt? Do you have shareholders? How efficient are the operations? How strong is the management team? Does the company have intellectual property? Is it the ideal geographic location? This is a comparatively short list of items that should be evaluated before buyers consider buying a business.
Money is also an important factor during this due diligence process. If the investigation highlights a number of concerns, the buyer may choose to withdraw, even after investing funds to investigate the acquisition. On the other hand, a troubled business can be an opportunity, allowing buyers to acquire a troubled business at a discount. If the buyer has the resources to fix it, the acquisition can provide many rewards. These benefits can range from geographic location, patents, customer base, real estate, plant and equipment, or talent.
Assuming financial and operational due diligence is attractive, there should be an agreement on the purchase price and how the money is paid to the owner and / or shareholders. This is a critical step as there are owners who own 100% of the shares in the company. If you are paid a lump sum (for example, $ 20 million), you can incentivize the owner to relax and decrease productivity. Without the need to work as hard as before, the buyer can expect lower business performance and / or a decrease in the value of the purchased business.
The other risk factor in the acquisition is the corporate culture. Companies like GE have a philosophy: when we buy from you, you’ll do things the GE way. Often times, like GE, the acquirer attempts to integrate two cultures into one organization. However, the process can be the most expensive part of a merger or acquisition. The Harvard Business Report says that between 70% and 90% of mergers and acquisitions fail or never realize the expected value. In some cases, when the acquisition fails, the buyer sells the acquired business for less than it bought.
That said, there are times when it is appropriate to build rather than buy. Bob Weissman, former president and CEO of Dunn & Bradstreet (D&B) is a good example. During his tenure, he spun off several D&B subsidiaries, such as Nielson Ratings. In addition, he started companies from scratch, such as IMS Health and Cognizant Technology. In 1994, he founded Cognizant with 42 people from within D&B. Today it employs more than 200,000 people and is listed on the NASDAQ Stock Exchange as a spin-off of D&B. IMS Health was also spun off and is listed on the New York Stock Exchange.
While not all building opportunities will be as successful as the D&B stories, the idea of growing it at home allows for more control. However, it is imperative that the local business is well managed by a strong team of executives. Without enough resources to hire top talent and make capital contributions, the idea of building can be a long process with mediocre success. Additionally, new ideas within an existing company can be overshadowed by current businesses. In many cases, there is a struggle to innovate in large corporations, as the employees will kill the new initiative.
As you can see, the issue of building or buying is not an easy one. Shopping is like instant mixing and stirring. You buy a company that is already doing what you want, except the challenge is later integration. The construction avoids the need for an integration process. The parent company becomes a private equity company that finances internal projects that could possibly be spun off. To do this, it takes talent, great organization, capital and a great commitment from the CEO who says this initiative is important. What would you choose?
