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Change is Good

Big acquisitions of local companies can create angst, or be viewed as success stories Spokane can build on

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On July 19, Avista announced it had entered into an agreement to be acquired by Ontario-based Hydro One. A few weeks earlier, Telect announced it had been acquired by Amphenol. Previously, it was PAML acquired by LabCorp, Demand Energy Networks by Enel Green Power and etailz by Trans World Entertainment. That makes five acquisitions of Spokane-area companies in roughly a six-month period.

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In many instances, the common worry is a loss of jobs and a reduction in corporate funding of community causes. While these are fair concerns, I believe these business transactions are an overall net positive for our region. These acquisitions reflect the maturation of an enterprise. Our future economic health, however, still depends on our region proactively and regularly birthing new companies — even at a higher rate than we're used to.

Among the reasons I believe in acquisitions of local companies by larger entities:

Infusion of incremental funding. Generally, buyers are larger and more substantial businesses, in many cases publicly held, with access to significant capital resources. This ensures that acquired entities will have the necessary funds to pursue growth objectives, including hiring new employees and purchasing additional property and equipment.

Realization of strategic synergies. Priced into acquisitions are strategic benefits accruing to the target; they may take the form of a more broadly recognized brand, a larger sales force and relationships with a wider swath of potential customers, great purchasing power with vendors, and economies of scale associated with more defined processes and procedures.

Migration of new and diverse talent. Integration of an acquired company typically involves transfer of new talent in varying degrees in operations, engineering, finance, marketing and/or sales. These individuals can bring experience and knowledge that otherwise may not have been recruited or organically developed, adding to the regional talent pool.

Creation of discretional capital. Acquisitions of regional companies may generate substantial capital gains for founders, investors and key employees. A portion of these gains often are reinvested into innovative new companies and community initiatives.

Verification of the quality of our business environment. Offering an educated and skilled workforce, providing an infrastructure conducive to efficient business practices, deploying business-friendly policies and tax codes, enabling a high quality of life and demonstrating affordability are competitive advantages. So acquisitions by large, reputable companies of Spokane-based companies verify the existence of these attributes, and serve as a flywheel for the formation of startups, recruitment of new businesses and additional acquisitions.

Through the acquisition of etailz, a transaction I am familiar with as a co-founder, I have witnessed these benefits firsthand. Trans World Entertainment has provided incremental funding enabling etailz to hire more employees, pursue new opportunities and grow at a faster rate than it could have accomplished on a stand-alone basis. The liquidity provided to many etailz investors has instilled confidence in the early stage investment model and has already been, and will continue to be, redeployed into new businesses.

Of course, not all acquisitions turn out as originally expected. Sometimes the investment banking skepticism of "buyers are liars" is true. Locally, there are no remnants of General Dynamics' acquisition of Itronix in 2005, nor PerkinElmer's 2010 acquisition of Signature Genomics.

Yet the "circle of life" is such that as small companies grow and attain industry leadership, they attract the acquisition interest of larger companies that are unable to innovate quickly and/or cannot achieve desired growth targets organically. This outcome is inevitable and desired.

We need to embrace the reality that the leading companies in our region may ultimately be acquired, view the outcomes as favorable overall, and accept the instances when they are not.

Silicon Valley does not develop angst when one of its stars is taken over; the community there applauds acquisitions as success stories. This is the lens through which we should view purchases of companies headquartered in Spokane.

The only missing piece is a focused, broadly supported effort to establish our region as a hub of innovation, with the requisite resources to identify, start, fund and nurture new enterprises. Avista understood this well and demonstrated a track record of successfully innovating new companies. Its offspring include Itron, Itronix, Ecova and ReliOn, in addition to funding several other emerging businesses in the region. I am hopeful the company's dedication and support to funding innovation will continue post-acquisition.

In parallel, however, a call to action to our economic development organizations, city leaders and entrepreneurs is in order to ensure that we are filling the pipeline of the next generation of industry-leading enterprises, and replacing the void created by recent acquisitions.♦

Tom Simpson is an entrepreneur, angel investor and advisor to startups and other businesses in the Spokane region. Simpson is a shareholder in Avista, held stock in Demand Energy Networks and etailz and served on the boards of Telect and etailz. You can reach him at tsimpson@inlander.com.