Acquihiring the right talent

December 2021  |  FEATURE | LABOUR & EMPLOYMENT

Financier Worldwide Magazine

December 2021 Issue

Companies pursue mergers and acquisitions (M&A) for a host of reasons. In an increasingly competitive business landscape, one motive is to access top talent at a target company – known as ‘acquihiring’.

Acquihiring is not a new concept. Companies within the technology sector, for instance, have been known to pursue talent-focused deals for years. Many of the biggest actively prioritise acquihiring deals. Mark Zuckerberg, chief executive of Facebook, has stated that his company does not acquire targets for the company itself; rather, it buys companies to hire great people.

As competition within the technology sector continues to intensify, it becomes increasingly difficult to attract top-notch talent. Acquihiring offers a chance to gain access to promising or proven talent, to assimilate a fully functioning team and to use their skills to boost innovation and growth.

Opportunity from crisis

Though acquihiring has been a feature of M&A strategy for some time, its popularity tends to rise in the aftermath of an economic crisis. Following the global financial crisis of the late 2000s, the early 2010s saw a flurry of acquisitions by Silicon Valley giants, such as Facebook, Google and Microsoft, aimed at acquiring employees with key skills. A similar round of acquihiring is expected in the post-COVID-19 landscape, as companies draw up plans to take advantage of emerging skills and accelerate their efforts to build niche capabilities.

One typical profile of an acquihire target is a start-up that was successful in raising initial early round funding, but found itself unable to secure additional financing in later rounds. Struggling and low on cash, such start-ups are more likely to be receptive to takeover.

With many start-ups facing reduced valuations in the wake of coronavirus (COVID-19), the opportunities for acquihiring are likely to spike. The pandemic crisis has spurred companies to re-evaluate their hiring policies and M&A strategies simultaneously, leading in some cases to talent-focused acquisitions.

Upsides and downsides

Acquihiring deals, when they go right, offer several advantages. For acquirers, they can provide fast, easy access to employees with a track record of working effectively together. Recruiting an entire team in this way avoids the need to nurture development, collaboration and cooperation from scratch, as individuals already operate harmoniously.

If the deal involves a start-up, the buyer is bringing on board innovative staff with new ideas and fresh perspectives on existing and forthcoming projects. This may lead to improvements in operational efficiency and user experience, for example, in a short span of time. Acquihiring can also remove competition by buying out a smaller rival, which has the added benefit of giving the buyer immediate access to their client base.

There can be pressures and drawbacks to an acquihiring transaction, however. For a start, unless they are contractually bound, there is no guarantee that employees of the target company will stay after a deal has been agreed. In the event that key individuals leave, this may undermine the entire point of the deal.

Beyond that, it is important to remember that acquihire deals can fail. Buyers may find that an acquired team does not produce the expected results. The buyer will want to get new individuals up to speed and performing as quickly as possible, to justify all the effort and cost of the transaction, and prove to stakeholders that it was a viable strategy.

Managing challenges and avoiding pitfalls

When looking to acquire another organisation specifically for talent purposes, there are several key areas a buyer needs to address. The first step is to consider the cost-benefit of going down the M&A route, as opposed to more traditional recruiting methods. Buyers should assess short- and long-term strategies, then seek out target companies that align with those objectives and can fill crucial talent gaps.

It is prudent to conduct cultural due diligence to determine whether employees are compatible with the acquirer’s vision and values. It may be necessary for individuals from a start-up to adapt to a more rigid, systematised corporate environment, for example, so finding out whether they are capable and willing to do so before the deal closes is imperative.

Buyers will also need to pay close attention to the drafting of employment agreements and compensation structures for the acquired team. Retention payments, restrictive covenants and individually tailored packages can go a long way toward protecting the acquirer and unlocking the full benefits of the transaction.

Post-deal integration is another vital area of focus. Onboarding may be improved by assigning a newly acquihired team to a particular project or goal, and providing them with a degree of autonomy. To make the process as smooth as possible, acquirers must properly manage the integration process to address any concerns of existing employees as well as potential resentment toward incoming team members.

In an increasingly competitive business landscape, talent-oriented dealmaking is already an effective acquisition strategy for tech sector companies. Going forward, it looks set to become more routine across a broader range of industries.

© Financier Worldwide

BY

Richard Summerfield