In the modern era, digitalisation is disrupting established business models and the automotive industry is no exception.
In order to stay competitive, automakers must adapt to the challenges of electric mobility and autonomous driving, and to meet these challenges companies need staffs of highly qualified and skilled employees with specialised know-how.
A topflight workforce is the key to innovation within any company, especially during this digital era. But how can companies acquire such talent pools? Developing home-grown talent in a company needs time, which the automotive industry does not have due to rapid technological change and intense competition. This begs the question: is there an easier and quicker alternative to building a team?
The answer is yes. Acqui-Hire can be used to integrate highly qualified, imaginative and specialised teams of employees into a company over a short time. An abbreviation for "acquisition and hiring", Acqui-Hire refers to a targeted takeover of all or part of the workforce of a given company and then making them part of the buyer's company. Already, the acquisition of entire teams of highly qualified employees is becoming an increasingly popular means for companies to acquire talent quickly and effectively.
Advantages and challenges of Acqui-Hire in the auto industry
Acqui-Hire avoids the lengthy and often costly process of recruiting individual employees. Teams built through acquisition and hiring are familiar with the latest technologies and help to facilitate a transfer of knowledge from their previous company into their new one, which allows the buyer to circumvent the time-consuming training phase.
Large corporations are often highly structured and process orientated. When a team is acquired from a start-up company, the result is often an innovative workforce that generates new impulses and positively disrupts the traditional business practices of the corporation. These start-up teams can further develop their own business model and open new complementary markets and technologies with the established company's financial and organisational backing.
Acqui-Hire's greatest asset, however, can also be its greatest challenge. If an established corporation acquires a start-up team with different work processes and structures, a "clash of cultures" can result. In an Acqui-Hire transaction, the buyer, usually a security-conscious corporate group with highly established structures and M&A experience, is often confronted with tech start-ups that are far less process-driven and usually less familiar with corporate transactions.
For the new relationship to work, everyone involved should be aware of the differences and be prepared to embrace new ideas. Not only does this make it easier to complete a transaction, it simplifies the process of integration and makes it more likely that the new employees will remain after the takeover.
Acqui-Hire: share-deal or asset deal?
An Acqui-Hire transaction can be structured as a share or an asset deal.
If the buyer is not just interested in acquiring the employees and their expertise, a share deal Acqui-Hire may be more effective. This is especially the case if important contractual relationships are to be transferred to the buyer and the consent of the contracting parties (required in an asset deal) cannot be obtained. If, on the other hand, the buyer is focused exclusively on the employees, an asset deal is preferable. This is even more applicable if only a part of the team is to be transferred to the buyer.
Securing intellectual property rights
Acqui-Hire transactions typically involve the buyer acquiring the intellectual property of the start-up company and utilising these systems in its own operations. However, the buyer should proceed with caution since not every brand, patent or industrial property right belongs to the target company. To avoid unpleasant surprises, due diligence should be carried out whether the target company owns the respective property rights or whether these are owned by a third party (e.g. individual employees or an end customer).
If an employee makes a patentable invention in connection with his employment, he is generally entitled to this right in accordance with the German Employee Invention Act (Arbeitnehmererfindungsgesetz). The employer can, however, claim the employee's invention by making a corresponding declaration. In this case, the employer acquires all exploitation rights to the invention, but at the same time must compensate the employee. The compensation payment is due as long as the invention is implemented and used by the employer. An Acqui-Hire transaction that results in a change of employer is irrelevant since the buyer would still be obliged to pay compensation on an ongoing basis.
This differs from the application of the German Copyright Act (Urheberrechtsgesetzes). If an employee creates a work protected by copyright while performing his duties or following the employer's instructions, the rights to this work are assigned solely to the employer. The employee is not entitled to receive separate compensation in addition to his basic salary. The protection of copyright applies to the development of computer programs, which is the main focus of tech start-ups.
The different perceptions of creative works and their ensuing legal consequences can cause problems for start-up companies. In comparison to large companies, such as in the auto industry, start-up businesses often do not have clearly regulated responsibilities, processes and resources for the "administration" of industrial property rights. It is often clear that inventions were made or copyrights created, but there is no clear assignment of the relevant exploitation right (e.g. because it was assigned to an end customer of the start-up). All these issues must be taken into account within the framework of an Acqui-Hire transaction and the buyer's due diligence.
Acqui-Hire transactions may fail if the employees of the target company are not satisfied with the overall change of ownership. There is a danger that the employees – the essential talent of the target – will leave. To prevent this, appropriate contractual terms can be added to their employment contracts.
Longer notice periods can be forged with key employees and agreements can include post-contractual non-competition clauses, which prohibit the employee from working for a competing company for a maximum period of two years after the end of the employment relationship. Non-compete clauses, however, are expensive because compensation has to be paid. Also, such a prohibition can only prevent employment with a competing company. Prohibition of competition does not prevent employment with a company outside the industry.
All retention polices depend on employee cooperation since these measures cannot be imposed on employees against their will.
There are other ways besides legal measures to keep employees on board. Engineers and other technical staff crucial to the automotive industry must be given the opportunity to develop further in their jobs and improve their skills in order to keep up with technological changes. In some industries, flexible working time models are commonplace. The automotive industry cannot afford to ignore worker desire for a strong work-life balance. Hence, if a buyer's working time models are too conservative, this may be an absolute no-go for many high performing employees.
A realistic prospect for career advancement is also an important factor in the long-term retention of employees.
Compensation is also important. A buyer can offer retention bonuses, which the employee will receive if he remains at the company until a certain date. Over the long term, issuing company shares to key employees is also an option since it enables them to participate in the company's economic development and have a personal stake in the company's performance.
From a buyer's point of view, it is crucial to find out the interests and priorities of key employees at an early stage so that a strategy can be developed to keep them with the company.
The post-merger integration phase begins after completion and is crucial for the long-term success of an Acqui-Hire transaction. The differences in corporate cultures and working habits of both parties will already be apparent during the transaction phase, however, and these differences stand to have a huge impact on post-merger integration.
To identify these differences and find ways of bridging them, early on all parties must work on concepts and ideas for post-merger integration and communicate their ideas immediately after closing. From the buyer's point of view, it may be beneficial to not fully integrate the start-up team directly into the company's structure. Giving the start-up team more independence in the initial phase of integration can help maintain its potential for innovation over the long term.
Acqui-Hire offers great potential for the auto industry
Acqui-Hire transactions offer considerable potential to buyers in the automotive sector. But to do this, the transaction must be prepared in fine detail with careful "follow-up work" done after its completion. The key is post-merger integration.
The priority for the buyer should be the employees of the target start-up company and its intellectual property. If the buyer does not have a coherent concept for employee retention and safeguarding the acquired intellectual property rights, the transaction may be doomed to fail before it is ever completed.