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M&A Integration: Creating Value From 'Acqui-Hires'

A look at acqui-hires and what they mean for your business

17Nov

Acqui-hire - The process of acquiring a company to recruit its employees, without necessarily showing an interest in its products and services (or their continued operation).

Acqui-hires has entered the vocabulary of M&A professionals in the recent past. There are many stories of organizations translating the art of such deals into science and seeing success with it, but there are also horror stories about such transactions. Although, the advent of 'digital' business models has taken the acqui-hire concept outside of technology companies, the bulk of these deals are still entrenched in the TMT (Tech, Media and Telecom - in that order) sectors.

Companies who master the art of aqui-hiring can enhance speed to market for their products by adding niche technical and operational talent. These skills fill critical product development needs or increase depth of certain markets and sectors. Although acqui-hire deals appear very similar in concept, there are similarities and differences.

Similarities:

- Driven by shortfall of engineering talent or highly skilled and specialized workers

- Talent typically comes from start-ups to accelerate hiring e.g., NPV of acqui-hire > organic recruitment execution

- Cohesive teams working together. Typically, founders have prior working experience with Product Dev executives of the acquirer

- Located in country, offshore resources are unlikely acqui-hire candidates (Microsoft made some exceptions)

Differences:

- Transactions can be originated by corporate development or engineering leaders. Speed from identification to deal close, transaction evaluation metrics and motives can vary based on origination.

- Accompanying business or products can be kept alive or wound down based on level of compatibility with acquirers' strategy

- Level of cohesion, maturity, price and motive could vary based on whether they are in the Series A vs Series B stage

- Angels vs venture capitalists funding can create multiple third party stakeholders with different motives

Acqui-hire transactions are not all the same. Investors are not entitled proportional shares of the value of the company e.g., a $5 million acqui-hire could result in the investor getting some insignificant fraction even if they own 5% of the company. Given that all employees are being hired and original operations will go away, the target has to pay off debts where applicable and equity ownership does not matter as much. It will be a better deal for investors to get something rather than a shut down and write-off, but this has triggered a sleuth of emotions and debate in the Silicon Valley circles. The higher the number of investors, the more complexities there will be in getting an acqui-hire transaction done. By the way, investors do have the ability to trigger blocking rights in the terms of their funding agreements if they wanted to.

Having advised my clients on a few of these transactions, here are some observations and lessons learned:

Product vs Sales Culture

It is generally a well-known fact that most Silicon Valley founders and CEOs have a strong bent towards either sales or product/engineering, they build cultures based on this affinity and tend to hire people aligned with that mindset. Even though the average worker bee appears to be made from the same technical fabric, it is a much harder transition from a sales oriented culture to a product oriented one and vice versa. A like-to-like transition has a much higher probability of success.

Talent Retention = Transaction Value

Typically acqui-hires is not the dollar windfall that people would have hoped for leaving some of the acquired employees yearning for that. Some equity (or options where applicable) will create the motivation for these hires to stay engaged, incentivized to create value in the organization, and not get distracted by the next shiny start-up promising wealth creation. In my experience, cash retention bonuses seldom work and the mere fact that cash is used as a tool tends to trigger the clock to exit.

It is important to set expectations with fair value of equity, options, and future grants based on results and value created. Acqui-hires are pegged at ~$1 million per employee, higher if there is there is IP, patents, longer tenures, early customer traction etc. Industry practices suggest acquired employees get a salary, some stock with approx. 4 year vesting period and a much smaller cash bonus. Certain acqui-hire transaction terms require all (or the majority) of the hired group to stay at the acquirer for 3-4 years, attrition below a certain threshold will cause the whole team to lose money.

Manage Executive Repatriation

One needs to pay specific attention to the skills and background of acquired executives. It is getting increasingly common to see people get to titles like Vice Presidents in large traditional organizations and then transition into smaller start-ups with similar titles. While larger organizations tend to 'title down' people from start-ups by calibrating them against the size, span, and job complexity of the acquirer-specific attention needs to be given to the people who had already marched up the executive ranks in prior jobs based on their caliber and experience. Under-titling them could lay a platform for discontentment and ultimately departure.

Bigger is Better

As ironic as it might sound, acqui-hires success rate has been higher in bigger organizations acquiring smaller, the bigger the difference, the better the chances of success. A smaller differential creates a false sense of 'merger of equals' creating conflicts on strategy, products, policies, priorities, and management styles. Specifically, conflicts are highest in the sales vs product issues and investments.

Brand Matters:

An acqui-hire transaction is never driven by the urge to re-brand a company, hence the brand transition needs to be quick in order to ensure a sense of identity and belonging through messaging in a positive manner. A unified brand, be it local, regional or global, creates clarity, consistency, loyalty and reinforces the purpose of the transaction. Not changing or delaying brand transition, can prolong the 'us vs them' mindset - if not activate it.

Manage Change (Both Sides):

The mindset of the acquired organization needs to be managed carefully. Existing employees have worked hard, stayed loyal and created a company capable of acquiring. The acqui-hires sharing the same floor and cafeteria now have earned much more money for just on-boarding through an acqui-hire transaction. There are no easy answers to cracking the code on this one - at least not as yet. On more than one occasion, I have been vented to by employees of acquiring companies. Even though most may not quit instantly, it certainly gets them thinking if this was a ticket to easy and quick money.

Employee Experience is Critical:

Managing employee experience is an important lever when integrating aqui-hires. The three big buckets that can make such experiences positive, neutral or negative are centered in policies, operations and systems (culture encompasses all of these), also not all employees are equally impacted by each of these areas. It is important to assess employee engagement and segment them based in what the acquirer learns. Designing safety nets and risk mitigation strategies need to be informed by data and analysis. A simple framework on how to think about this is given below (% indicates % of employees). Typical examples of safety nets are training, communication, autonomy, incentives, mentors/sponsors, affiliations, and even well-organized change management programs.

Measure Success:

Multiple Silicon Valley companies have deployed the acqui-hire strategy, be it Google, Facebook, Microsoft or Yahoo, some have even done multiple deals with higher success rates. The key question is how to measure success and what metrics to deploy in order to track the ROI from such acquisitions. A few that I have recommended and also seen in action are as follows (non-exhaustive list) :

- Time to close the transaction

- 'Productivity day one' (on-boarding effectivness)

- % employees retained after 12 months

- % executives retained after 12 months

- Acqui-hire NPV of current transaction > NPV of prior transaction > NPV of organic recruitment

- Employee engagement scores

- Skill transfer rate (to acquirer)

Although there have been mixed feelings across the board regarding Acqui-hires in the investor, founder, acquirer and aqui-hires themselves, this trend is likely to continue with some years having more transactions than others. Acqui-hire transactions can be smoothened by using some very simple guiding principles with some of the mechanics still evolving.

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