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Twenty-two

Opinion: Dr Paul Hopkins

Acquisition can be good for you…

Opinion: Dr Paul Hopkins

Acquisition can be good for you

The word “acquisition” conjures up images of the latest great hope being hoovered up by a ruthless and predatory international competitor, depriving the Scottish economy of the spoils from the (always guaranteed) Next Big Thing.

Inward acquisitions (where an indigenous business is acquired from outside Scotland) are often assumed to lead to closure, a transfer of higher-value functions out of Scotland, asset stripping, a ‘branch plant economy’ and a loss of economic activity, signifying a lack of ambition.

But is this borne out by the evidence? The answer, based on the latest analysis run by Scottish Enterprise, suggests not.

In Scotland, acquisition is a strategy used by higher and faster-growth companies, particularly younger ones, to realise their growth ambitions; it is used to secure investment and ensure access to markets, clients and customers at a pace that many companies simply are not able to achieve on their own. It is not something that simply happens to Scottish companies, and occurs in every economy, often at a higher rate elsewhere. It is a challenging and high-risk approach, with many pitfalls, but one that can and has proven successful.

Whatever the outcome, acquisition enriches those entrepreneurs who take the risk and put the time in to grow a company. Our research found that ambition amongst many Scottish companies is high. We also found that many companies use acquisition to vault to the next level and achieve wider economic benefits, with the impact on staff and leaving a legacy high on their wish-list.

In 2015, we tried to ‘follow the money’ post-acquisition. We ended up following the individuals who exited following an acquisition, and found that their impact, knowledge and experience, skills and investment are spread more widely than when working in only one company. It is rare they simply stop being economically active, and the challenge comes in trying to help these individuals find the companies in Scotland which can benefit from their expertise and advice, as well as investment, since we also found that money follows talent – a clue perhaps for future policy initiatives. An acquisition also provides a return on investment for investors.

So, the evidence challenges the assumption that acquisition limits economic growth in Scotland.

Firstly, only a very small group of companies acquire and/or get acquired, and Scotland sees less overall activity than many similar-sized European nations. Other nations and regions of the UK see more inward acquisitions yet have a greater number of growth companies, which suggests that the issue for Scotland is not about the level of acquisition but the number of companies able, willing and ready to consider it as an avenue.

This is not to say there are no examples where companies have been acquired and there has been no benefit to the economy. This is unquestionably true, but Scotland has the best rate of those inward-acquired companies remaining active and remaining based in Scotland, demonstrating the positive impact of policy initiatives to anchor companies here. This ensures more benefits from an acquisition remain in Scotland than elsewhere – challenging the idea of a vulnerability specific to Scotland.

The acquisitions data (corroborated by other evidence developed by Scottish Enterprise) suggests that the challenge for Scotland relates to growth rather than acquisitions. This may in part explain the concern over acquisition. When the pool of growth companies is small, a lower number of acquisitions can cause a greater level of anxiety than if the pool was larger.

Indeed, this nervousness may be a consequence of the ‘gap’ between the rate of being acquired and making acquisitions being greatest in Scotland, not because of a high inward rate (which is mid-ranking) but because of the low acquiring rate.

Therefore, the question is whether to focus on increasing the number of growth companies or on limiting the number of acquisitions. Limiting acquisition (regardless of how this could be implemented) may lead to less access to skilled individuals as well as to less investment for new, emerging companies to tap into – including companies which may have the potential to be the next Skyscanner.

Limiting acquisition would also create a cycle which further limits entrepreneurial and business growth, leading to a deterioration in Scotland’s reputation as a place where high-quality, dynamic businesses emerge, grow and thrive. One notable comment put to me during an interview was: “If no one wants to buy any companies here, we’ve got a huge problem.”

Perhaps the most realistic approach is, therefore, to focus on stimulating more growth companies. In that regard, the focus of the new Strategic Board on scale-ups is most welcome and one of the ways – currently under-utilised – in which more Scottish companies could achieve and sustain growth is, when appropriate, through acquisition. Given a greater percentage of acquisition activity (but not total numbers) in Scotland involves young companies, consideration could be paid to supporting more established companies which perhaps have plateaued after an initial growth episode.

The research presents a strong case for widening the understanding amongst companies, entrepreneurs and stakeholders of the role and benefits of acquisition. It highlights the fact that there are some strong fundamentals on which to build but, perhaps most importantly, challenges the idea that acquisition is a thorn in the side of Scotland realising its ambitions for sustainable, inclusive growth.

A copy of the report is available online.

Dr Paul Hopkins,
Scottish Enterprise Economic Research Team

 

 

"Opinion: Dr Paul Hopkins". Science Scotland (Issue Twenty-two)
Printed from http://www.sciencescotland.org/feature.php?id=342 on 19/11/18 06:31:47 PM

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