This post is part of the My Zawya Story series.

If negative cash flow the main characteristic of the foundation phase of a start up and break even cash flow represents the institutionalisation phase then the third phase is growth represented by increasing positive cash flows. This is where the fun begins. All stakeholders are basically happy, assuming a lack of greed, and strong excess cash flow growing at close to a triple digit rate really opens up the options in achieving your vision. The three main choices, not necessarily exclusive, are pay dividends to the shareholders, invest in organic growth and grow via acquisitions.

The classical decision to pay a dividend or not depends on whether the company can productively invest the excess funds. In Zawya’s case the answer was a resounding yes. As Chairman I had no hesitation recommending that no dividend be paid. In fact several existing shareholders desperately wanted to further invest. There was also a long line of new investors who wanted to invest in the company. Tempting as that was, we simply could not see how we could  deploy new funds over and above the cash generated by operations and decided to avoid creating an equity drag. This disciplined decision was part of the reason that Saffar got an excellent return on equity.

Investment in growth was the easy decision. More difficult was the decision on the mix of organic versus acquisition growth. What the latter potentially offered was speed. What the former offered is known quality control. The risk of the organic route was that in the now heated market lagging competitors could find large investors who would enable them to remain competitive with Zawya. The risk in terms of acquisitions centered around integration of the acquired company.

Before I continue the discussion on growth a clarification is in order. At this point Zawya did not have enough cash to acquire a company of significant size. However Zawya equity had now become a currency more valuable than cash and this not only opened the door for acquisitions it actually attracted many potential partners to initiate a dialogue with us.

Back to growth. We decided that organic growth had to be part of the core strategy regardless of whether we acquired one or more companies. As we evaluated potential targets one characteristic became clear: all potential targets were at that time owned and managed by founders. Having two sets of founders trying to run a newly merged company was clearly a recipe for disaster. We settled instead on buying value accretive databases when we could.

The market had a difficult time understanding why we would not grow via acquisitions. This was in the 2005-2007 period when the economies in MENA were booming. I am not sure how or why this belief that acquisitions are automatically a good thing came from. Maybe it is self serving investment banker marketing. Maybe it is hollywood movies and newspaper reporting painting acquisitions as sexy. Integration costs and in particular human capital issues make acquiring whole companies tricky and entrepreneurs would be well served to consider if there are alternative ways to acquire the assets, human or otherwise, of another company without having to buy the company outright.

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