When acquiring tech companies & their human talent, there are some key considerations that buyers should take into account when formulating their M&A strategy
Compared with most other industries, when a potential purchaser is considering the prospect of acquiring a tech business (and considering its M&A strategy), the tech talent can sometimes be the most important asset that it wishes to acquire; often leaving the business itself as a secondary after-thought.
Consequently, there can oftentimes be a question mark over whether it is more advantageous to hire the talent or acquire the business as a whole.
Here are a few thoughts which may need to be considered in this context…
Acquiring talent rather than shares
1) Labour over liabilities
One of the key benefits of acquiring talent directly rather than the shares is avoiding the liabilities associated with acquiring a target company. Although the doctrine of the "corporate veil" is still very much alive in the UK, prospective purchasers would be wise to weigh up the desire for talent against the accrued liabilities of a tech start-up/growth company (which are often highly leveraged in the development stage).
It goes without saying, but the "cost" of the acquisition is an essential consideration. It will almost always be cheaper to acquire the talent rather than a target company (especially when the parties get into conversations about net asset value, multiples, cash free/debt free calculations, etc...). However, this must be balanced with any headhunting fees and/or a "golden hello" that the talent may be pushing for.
3) Integration & motivation
The importance of the post-completion integration phase is not to be underestimated and can be expensive in terms of time and cost. Integrating an individual or team into your business, rather than an entire subsidiary (or a target group!), can help to alleviate this issue altogether. Added to this, who wouldn’t love to be headhunted for a new role? Especially if it comes with a healthy increase in remuneration! It’s a natural motivator for any employee; kick-starting the drive towards the purchaser's acquisition objectives – rather than the uncertainty of being part of an acquired business.
Acquiring shares rather than talent
1) Where’s the value?
Purchasers should be very clear in their mind as to what it is that they really want to acquire. The talent may be irresistible and plug a skills gap; however, quite often it is the technology belonging to the target company that holds the real value rather than the clever employee who developed it. By acquiring the employee, you have the "potential" for greatness but not the technology that caught the purchaser's eye in the first place. In addition, can you be sure that the talent that the purchaser is seeking to acquire is the correct individual(s)/team(s) that provide the real value? It's also worth bearing in mind what the talent is looking to get out of the transfer – do they see a great opportunity to develop at your company or just a way to leverage how "in-demand" they are in order to boost their remuneration in the short-term?
2) Restrictive covenants
Debates around the enforceability of restricted covenants should not be dismissed lightly. Any well-advised tech company will ensure that the restrictive covenants in their employment agreements are appropriate and, above all, enforceable; and include provisions which provide that any intellectual property developed by the employee (especially code, software, algorithms, etc.) exclusively belong to the employer. It is not unheard of for a disgruntled ex-employer to try to prove it has suffered a loss (and pursue damages) as a result of an employee moving employers and/or taking "IP" with them; which is a risk to the new employer and employee alike.
A strong brand can hold as much value as the technology itself; consider whether Uber would actually be able to compete with the likes of Deliveroo and Foodpanda if they had branded as "Eats" or "U Eats" rather than "Uber Eats"? Acquiring the talent behind the technology can sometimes be only half the story and lead you to start from scratch rather than leverage an already successful proposition.
Ultimately, the decision between hiring or purchasing hinges on one question; what do you want to acquire? This may seem like an obvious point, but it can sometimes (and oftentimes does) take a back-seat when the deal team is running full-speed at an acquisition.