Does Acquihiring Lead to Better Outcomes in the Technology Sector?
A Q&A with Affiliate Toby Stuart
The technology sector is characterized by frequent M&A activity. Although acquirers have multifaceted motivations for many deals, one of the principal strategic aims of transactions in this sector is the acquisition of new technical talent. But is this a successful approach to deepening and extending the talent base of the acquiring firm? Senior Advisor Jeffrey Cohen and Managing Principal Jee-Yeon Lehmann spoke with Toby Stuart – Professor and Leo Helzel Chair in Entrepreneurship and Innovation, and Faculty Director of the Institute for Business Innovation and the Berkeley-Haas Center for Entrepreneurship, at the Haas School of Business at the University of California, Berkeley – about the so-called “acquihiring” trend among technology companies, and what Professor Stuart’s research reveals about its impact on the labor market for tech talent.
Toby E. Stuart: Professor, Leo Helzel Chair in Entrepreneurship and Innovation, and Faculty Director of the Lester Center for Entrepreneurship, Haas School of Business, University of California, Berkeley
Mr. Cohen: In recent years, there has been a consistent – and increasing – level of M&A activity in the technology sector. You have noted that a strategic rationale for many of these deals is that they are a primary means of recruiting new technical talent into the firm: acquihiring. What is acquihiring?
Professor Stuart: There is a narrow definition of acquihiring, which refers to buying a firm solely as a means to recruit talent. Such deals – where the only strategic rationale is the acquisition of new technical talent – tend to be small and are not very common. However, a principal motivation in many M&A deals in the technology industry is the acquisition of new technical talent. Typically, a very important consideration in the value of an M&A deal is the quality of the human capital in the firm that is being acquired.
Dr. Lehmann: Why do firms choose to acquihire? Do companies see this as a way to fast-track innovation into their firm?
Professor Stuart: Yes. The labor market for certain types of technical talent is very tight in certain geographic areas. A prime example is the Bay Area, where I spend a lot of my time. Another driver for the acquihiring trend is the notion that a fully functioning team is worth more than the sum of its parts. Both large and small organizations are familiar with the cost of suboptimal team dynamics. These organizations understand the value of stable, highly functional teams. Incorporating teams that already are well-functioning through an acquisition can accelerate the formation of a productive talent base in areas that extend the existing know-how of the acquirer. Typically, the acquirer is also going to be interested in the particular technological problem that the team at the acquired company was assembled to tackle. In other words, acquihiring can be an efficient way for large companies to reduce the cost of search for technical talent.
Jeffrey A. Cohen: Senior Advisor, Analysis Group
Mr. Cohen: Your research is the first systematic analysis of the outcomes of acquihires. What made you interested in this research question?
Professor Stuart: Until recently, researchers have not paid much attention to the impact of M&A on labor market outcomes. Instead, they have typically focused on the acquisition’s impact on the product or the service market. My research was motivated by a nagging suspicion that many large corporations may be overpaying for talent acquisition given the rates of labor mobility in tech. We know from the dollar value of M&A transactions that a tremendous amount of public shareholder capital is flowing into the acquisitions of small tech companies. For years now, there have been many more M&As of venture capital-backed tech companies than IPOs. For the acquired entity, the payoff is more salient, as these deals often create liquidity and exit opportunities for investors and employees. While the benefits to the acquired are obvious, I’ve always wondered about the payoff of these types of deals for the acquirer. M&A transactions are extremely difficult to study, because outsiders to the deal can’t observe the strategic rationale for acquisition for both parties.
I wanted to study outcomes of acquihires in the tech industry in a scientifically rigorous way. It occurred to me that if we could assemble a large resume database, with career histories of millions of people, one could then find many cases in which an acquirer hired an individual with a particular human capital profile – say, a computer science degree from a top 10 department and 12 years of labor market experience as a back-end developer – via an acquisition. Then the individual could be matched to another individual with a similar profile who was hired into the organization via an organic process around the same time. By comparing how the careers of the “twin” employees – one acquihired and one organically hired – evolve at the acquiring firm, we can better understand the strategic value of acquihiring as a means to deepening and extending the talent base. To be clear, we need the sample of organically hired employees to create counterfactual career trajectories that serve as a baseline comparison group for acquihired employees.
Jee-Yeon Lehmann: Managing Principal, Analysis Group
Dr. Lehmann: Your research findings indicate that turnover rates of acquihired employees are much higher than organic hires. What factors do you think contribute to this finding?
Professor Stuart: Yes, acquihired employees have a much higher turnover rate than do organically hired individuals. I think the higher rates of turnover for acquihires can be attributed to two factors. The first is a matching story. Many individuals who are acquihired by a more established or larger firm had previously chosen to work with a startup or a small firm. This means that they may not be the best match for an established firm. In other words, the acquisition of a startup by an “established” firm may create mismatches between the preferences of acquihired employees and the nature of the job post-acquisition. The second is a financial payout story. Because acquihires had typically held equity at the startup, it is likely that they financially benefitted from the acquisition. This near-term financial payout can create additional incentives for employees to leave. To summarize, compared to organic hires, acquihires maybe be poorer matches to the acquiring company; coupled with their near-term financial stability, acquihires likely choose to leave their employment at a higher rate than organic hires with a similar profile.
I also think that acquihiring plays a central role in the creation of startup founders. Many acquihires will have not only the liquidity to fund such ventures but also the experience of having worked at a startup as well as a large company. I’m starting to think about the extent to which the acquisition process may be a driver of new venture formation.
Mr. Cohen: There have been a number of recent legal and regulatory challenges and discussions related to competition in the labor market, examining both its direct impact on workers, as well as indirect effects on competition in the product market (e.g., no-poach and non-compete agreements). In your view, is acquihiring good for innovation and competition? Or is it possible that major tech firms may be using acquisitions to preempt an emerging competitor from competing down the road?
Professor Stuart: There are certainly competitive dynamic considerations that are part of technology-based acquisitions. At a high level, the health of a startup and the innovation sector is deeply impacted by the existence of a so-called “exit market.” This market creates liquidity in the private market and attracts risk capital. Are there certain individual cases that may be abusive and may cross the line? Yes, but many other acquisitions create value and efficiency and encourage innovation.
Dr. Lehmann: Many workers in the tech sector are bound by non-compete arrangements. Is there any connection that might be drawn between acquihiring in Silicon Valley and acquirers seeking to circumvent non-compete laws in California?
Professor Stuart: There is an ongoing tension in the courts as they attempt to balance the enforcement of non-compete agreements on behalf of employers with potential anticompetitive concerns associated with these provisions. A key consideration is how to properly balance the importance of protecting a company’s right to protect its assets and an employee’s right to take these assets and ideas with them.
Many workers who leave startups are bound by non-compete agreements, which makes it more difficult to get a return on your talent, at least in the near term. Acquihiring can actually increase the return on talent for startup employees. Being acquihired provides an immediate payout, and then another payout after the vesting period. For some individuals, these payout options might not exist otherwise. Thus, acquihiring can create greater incentives for people to go into startups, and foster a deeper and broader talent base in the startup space by creating potentially lucrative exit opportunities for them. In other words, the possibility of acquihiring creates an option value in the form of a potentially large payoff for startup employees, even if their product doesn’t reach the marketplace.
Mr. Cohen: You have collected and analyzed a staggering amount of resume data for your research. How challenging was that process?
Professor Stuart: Yes, the core of our data in this research project comprises many millions of resumes. I’ve been interested in researching this topic for a number of years, but until recently, we have not had sufficiently powerful algorithmic methods to gather and analyze such a large amount of data. These days, there are a number of data science techniques that one can employ to approach this particular kind of problem, which makes this an ideal time for these types of empirical analyses. As is the case in so many sectors of the economy today, the ability to acquire and analyze large troves of data in an efficient manner is creating fundamental changes in our understandings. ■