Why to buy – and when to walk

By Jennifer Deinlein, Contributing writer

In some cases, businesses grow by introducing new products, adding employees or expanding infrastructure. And in others, those same benefits can be realized by purchasing another company.

Companies need to evaluate which is best for them, said Matt Roberson, a principal at Sparks, Md.-based SC&H Capital. He oversees the Central Pennsylvania market for the company.

But an acquisition is usually quicker, he said: “There’s … risks, but the reward would be higher because I can do something faster or sooner.”

In some cases, organic growth is difficult, such as in a mature industry like banking, said Katie Smarilli, a partner at Lewisburg-based Murphy McCormack Capital Advisors. Acquisitions open up growth and opportunities for the future that businesses may not have found otherwise.

“A bank can grow their client base by buying another bank and don’t have to sell every checking account or loan,” she said. “Then they have the opportunity to consolidate their operations, gain increased revenue out of the client base and reduce administrative expenses.”

Other reasons a company may pursue an acquisition include the desire for vertical integration, in which a company protects its business model by acquiring a competitor with a key vendor or customer, Smarilli said.

Companies also may seek geographic opportunity, or the chance to gain new markets, facilities, technology or talent — all much more quickly and with a better foundation than trying to make gains organically.

Ronald Myer, president of Summit Advisory in Strasburg, Lancaster County. “You can immediately step into the other company’s shoes and provide a service or product.”

Myer said that sometimes, the acquired company has customers to whom the combined business can cross-sell — offering products rom each company, thus giving the buyer the opportunity to sell more products overall.

“You can do more that you couldn’t do because you didn’t have access to those customers or products,” he said. But acquisitions are not always successful, nor are they easy. First, the buyer must do its due diligence and look at the potential acquisition objectively, Smarilli said.

“What are the benefits? What are we really buying?” she said. “If you don’t do due diligence and don’t ask yourself independently and objectively those questions, you may not be buying what you think you’re buying.”

Companies must also be able to successfully integrate the new acquisition, and the experts noted that company cultures must be carefully examined prior to purchase to prevent a clash that can doom the transaction. Clashes can cause a loss of key employees, customers or vendors.

“It is easy to look at the financials of an acquisition, but if the management style does not match, it becomes very difficult to integrate the two companies,” Myer said. “It doesn’t bring any value to run both companies exactly as they were before.”

In the end, sometimes a deal just isn’t a deal. When should companies walk away from a potential transaction? It boils down to finding, after careful consideration, that the risks outweigh the rewards.

Myer said it is time to walk when there isn’t value to either the buyers or sellers, or to customers.

“It doesn’t have to be all three, but one of those,” he said. “It has to provide benefit to somebody, ideally to everybody. Otherwise, it may have short-term benefits but in the long run won’t survive and flourish.”