M&A Integration: Creating Value from “Acqui-hires”

“Acqui-hires” have entered the vocabulary of M&A professionals recently. While there are many stories of organizations translating the art of such deals into science and having success with it, some companies still have horror stories about such transactions. Although “digital” business models have taken the acqui-hire concept outside of technology companies, the bulk of these deals is still entrenched in the TMT (Tech, Media, and Telecom — in that order) sectors.

Talent Acquisition Process

Companies who master the art of “acqui-hire” can enhance speed to market for their products by adding niche technical and operational talent. These skills fill critical product development needs and increase the depth of certain markets and sectors. Although acqui-hire deals appear similar in concept, there are still some differences that need to be taken into consideration.

Similarities:

• Driven by a 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 work together; typically founders have prior working experience with Product Dev executives of the acquirer.
• Both in-country and offshore resources are remote acqui-hire candidates

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 businesses or products can be kept alive or wound down based on the level of compatibility with the acqui-hire strategy.
• The 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.

Acquihire transactions are not all the same. Also, investors are not entitled to proportional shares of the value of the company.

Here’s one of the prominent acquihire examples:

A $5M acqui-hire could cause the investor to get some insignificant fraction even if they own 5% of the company. Given that, all employees are hired, and the original operations will go away — the target must pay off debts where applicable and equity ownership does not matter as much. Moreover, it is a better acqui-hire deal structure for investors to get something rather than a shutdown and write-off. However, this has triggered a sleuth of emotions and debate in the Silicon Valley circles.

Investors can trigger blocking rights in the terms of their funding agreements if they want to.

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

Product vs Sales Culture

It is a well-known fact that most Silicon Valley founders and CEOs have a strong bent toward sales or product/engineering. They build cultures based on this affinity and hire people aligned with that mindset. Even though the average worker bee is 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.

Acqui-hire Valuation

Typically, an acqui-hire is not the dollar windfall that people hoped for leaving some of the acquired employee’s yearnings 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 that cash is a tool that triggers the clock to exit.

Set expectations with a 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 IP, patents, longer tenures, early customer traction, etc. Industry practices suggest that acquired employees get a salary, even some stock with approx. 4-year vesting period and a much smaller cash bonus. Certain acquihire transaction terms require all (or 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 getting 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 marched up the executive ranks in prior jobs based on their caliber and experience.

Under-titling them could lay a platform for discontentment and departure.

Bigger is Better

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

Brand Matters

Acquihire transactions are never driven by the urge to rebrand a company; hence, the brand transition needs to be quick to ensure a sense of identity and belonging through messaging positively.

A unified brand — be it local, regional, or global creates clarity, consistency, and loyalty while reinforcing the purpose of the transaction. Not changing or delaying brand transition can prolong the “us vs them” mindset.

Manage Change

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

Employee Experience is Critical:

Talent Acquisition in HR

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 on policies, operations, and systems (culture encompasses these). Also, not all employees are equally affected by each area — assess employee engagement and segment them based on 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).

Measure Success

Multiple Silicon Valley companies have deployed the acqui-hire strategy — be it Google, Facebook, Microsoft, or Yahoo; and some have even done multiple deals with higher success rates. The key question is how to measure success and what metrics to deploy to track the ROI from such acquisitions.

A few I have recommended and seen in action are as follows (non-exhaustive list):

• Time to close the transaction
• “Productivity day one” (onboarding effectiveness)
• % 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 the acquirer)

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