Acqui-hiring is a relatively novel acquisition practice of established technology firms. Unlike traditional technology acquisitions motivated by obtaining the product/technology of the acquired firm, acqui hires are primarily motivated by gaining access to the talented human capital of start-ups. Established technology firms such as Google, Apple and Facebook have been steadily investing in acqui hires in recent years.
The Unique Nature of Acqui Hires
To understand the key characteristics of acqui hires and the differences between acqui hires and other technology acquisitions, We examined two cases (MovieReview.Com, VisualSearch.Com), which were pure talent acquisitions and two cases (WristWearCo, EyeWearCo), which involved the acquisition of both talent and technology. In line with prior research (Chatterji and Patro, 2014), the case study revealed that the acquirer’s disinterest in the acquired start-up’s existing product/service is a key characteristic of an acqui-hire. This is evident from the immediate shutdown of the acquired firm’s product following the acquisition in most cases.
In the acquisitions of MovieReview.Com and VisualSearch.Com by SearchCo, the products of the target firms were shut down immediately after the acquisition. The managers of SearchCo indicated that in both cases the intention was not to use the target firms’ products but rather to hire a talented team who were working on an area that SearchCo was interested in. They emphasized that the primary motivation driving the deals was to have access to the talented employees of the acquired start-ups.
“We were not going to use the product as is, we thought that hiring talented engineers who had been working together on an area which was close to what SearchCo was doing would be good.” [Product Management Director, SearchCo]
“It is more like this is a team of good engineers who has worked on a certain area that we are interested in and they can help us do something in that area.” [Product Management Director, SearchCo]
“There would be a team that is already working on something very close to what SearchCo wants to build and then we get them, and we just embed them into our existing teams.” [Principal, Mergers and Acquisitions, SearchCo]
Although both MovieReview.Com and VisualSearch.Com’s products were shut down swiftly after their acquisition, the case research revealed that some acqui hires may not involve the immediate shut down of the acquired start-up’s product. In the rare case that the product of the acquired start-up is not shut down immediately after the acquisition, the acquirer lets the product live on for a while for existing users without accepting new customers or making additional investment. Alternatively, the product of the acquired start-up may be offered free or open-source by the acquirer, again showing that the acquirer has no interest in the product itself.
The case study also revealed the following characteristics of acqui-hire deals. First, the small team size of acquired start-ups is an indicator of an acqui-hire. The case research revealed that the team size of an acqui-hired start-up ranged between 1-10 and 11-50 in general. Second, acqui-hired start-ups are most often early stage start-ups that does not have a mature product but rather an idea or a product that is at the stage of development.
Accordingly, acqui-hired start-ups are early stage in terms of financing too. The case research revealed that acqui hires are most commonly seen after the first few rounds of financing. Finally, deal size is also another indicator of an acqui-hire. There was consensus across informants that the size of an acqui-hire deal does not exceed $100M in general.
“An acqui-hire is when the team does not have a product yet, but they are working on something good and the acquirer is buying the company just for the engineers.” [Angel Investor, VisualSearch.Com]
The Underlying Motivations of Acqui Hires
The case study revealed that the main motivation underlying acqui-hire deals is to have access to a proven team with a coherent way of thinking. The acquired start-up’s team was cited as the most valuable asset of an acqui-hire. The reason why acquirers prefer acqui hires over individual hiring is that it gives them access to a team that is accustomed to working together and experienced in a certain domain.
Moreover, through acqui hires acquirers have access to talented employees who they would not be able to hire through regular hiring processes. The acqui-hired start-up founders and employees confirm that they wouldn’t have joined a corporate giant like SearchCo, had it not been for the acqui-hire. Because established firms have long and cumbersome interview processes and the payoff is considerably higher when they join an established firm through an acqui-hire.
“The reason why established firms like SearchCo acqui-hire rather than simply hiring is that the acqui-hired team has been working together already, there is a good working relationship that those people presumably have.” [Principal, Mergers and Acquisitions, SearchCo]
“None of us would have gone and applied to SearchCo because we liked working in start-ups and we weren’t attracted to big companies. The thing that got us all join SearchCo was the fact that they acqui-hired us.” [Founder, MovieReview.Com]
“SearchCo acqui hires small groups of talented engineers working on a certain area that they are interested in and looks at how they can implement their ideas at SearchCo’s scale. They acquire talent, let them work with other people within SearchCo and use SearchCo’s infrastructure and try to obtain 10X, 100X of their investment. Plus, the acquired team has a coherent way of thinking which is not possible to obtain through individual hiring.” [Engineering Manager, VisualSearch.Com]
Catching-up with or preempting competitors was also stated as other motivations of acqui hires. When an established firm is behind its competitors in a certain area then they acqui-hire a start-up working on that area to catch-up with their competitors utilizing the skills and know-how of the acqui-hired employees. An established firm may also conduct an acqui-hire to preempt its competitors by hindering their access to the talented employees of the start-up and utilizing the acqui-hired start-up’s know-how to enter or create a new market and gain early mover advantages.
“There are several reasons why SearchCo conducts acqui hires. First one is to quickly enter into a new market. We can enter a new market not through hiring but through acqui-hiring because hiring process takes a really long time in SearchCo. But instead we can go and buy teams who are already working in that area.” [Product Management Director, SearchCo]
“The reason why big firms acqui-hire rather than hiring the individuals they target has to do with financial aspects. It may be really important for instance for SearchCo to hire a certain very talented engineer before its competitors, but it would not be able to give that engineer the salary he wants if it hires him through regular HR processes. Acquiring his company instead enables SearhCo to offer him a better deal.” [Angle Investor, VisualSearch.Com]
Acqui-hiring as a Real Option
Real options are investments in real assets made not primarily for immediate cash flows but for the economic value that will be generated via future growth opportunities (Kester, 1984). Real investments can create value by conferring two different types of options which are mutually exclusive: strategic growth options and options to wait-to-invest, i.e. deferral options. These two types of real options, however, have different sources of value. While strategic growth options create value through the strategic advantages arising from early investment (Kulatilaka and Perotti, 1998), deferral options generate value through the managerial flexibility resulting from delaying the investment.
Acqui-hiring can be thought of as a real option because it involves investing in talent without any expectation of immediate cash flow as made evident by the shutdown of the start-up’s product. The aim of the acquirer is to develop new solutions and take advantage of future growth opportunities utilizing the acquired talent’s skills and know-how. Moreover, different from other start-up investment modes (e.g., Corporate Venture Capital investment, minority equity investment) or collaboration agreements, acqui hires involve keeping the acquired team intact and generating value through their collective know-how.
We argue that while acqui-hiring a start-up presents the acquirer with a real option, whether the option value generated by the acqui-hire is growth or deferral based depends on the pace of the commitment of the acquirer into the acquired start-up. The acquirer may either invest immediately by assigning the acquired start-up’s founder to a high status position and structurally integrating the team of the start-up or it may wait for uncertainties to resolve before making such a commitment. On the one hand, making an early commitment in the presence of uncertainty leads to an opportunity cost causing the acquirer to lose the potential to make a different decision once the uncertainties are resolved.
On the other hand, deferring the commitment in the presence of growth opportunities may lead to preemption by competitors thus eroding the worth of future growth options. These different investment decisions of the acquirers correspond to two distinct types of acqui hires both of which are frequently observed: growth acqui hires and deferral acqui hires. Below We describe the characteristics of growth and deferral acqui hires and explain how these two acqui-hire types can create value through different means.
Growth Acqui Hires
We define acqui hires that involve the appointment of the acquired start-up’s founder to a high status position (e.g., senior director or vice president) and the immediate structural integration of the start-up’s team as growth acqui hires. Prior literature defines structural integration as the complete integration of the acquired firm into the acquirer as opposed to structural separation, which refers to preserving the acquired firm as a distinct organizational entity.
In the case of acqui-hiring, the acquired team is almost always integrated into the acquirer. However, the pacing of the integration process differs. We refer to the case in which the acquirer directly integrates the acquired team into a specific business unit after the acquisition as immediate structural integration and the case in which the integration is carried out incrementally as staged integration.
Following Graebner (2004), We argue that assigning the acquired start-up’s founder to a high status position after the acquisition enables the acquirer to take better advantage of future growth opportunities. Prior literature highlights that the knowledge and skills of founders are key factors that lead to differentiation and growth for technology firms. However, the ability of acqui-hired founders to generate future growth opportunities for the acquirer depends to a large extent on whether they have the necessary power to be influential in decision-making.
Finkelstein argues that “top managers’ power plays a key role in strategic decision making” (1992: 505) and prior literature suggests that a higher-ranking managerial position is an indication of authority and power. When assigned to a high status position that grants them the necessary authority and power, the acquired entrepreneurs can champion new ideas from development to reality, thereby developing new businesses within the acquiring firm.
Moreover, We argue that immediate structural integration of the acquired start-up also enables the acquirer to promptly seize future growth opportunities. Grant argues that in technology-intensive industries, “the critical source of competitive advantage is knowledge integration rather than knowledge itself” (1996a: 380). Prior literature also suggests that structural integration enhances knowledge transfer and coordination between the acquirer and the acquired firm.
By immediately integrating the acquired start-up’s team, the acquirer gains an opportunity to quickly enter into a new market in which the acquired start-up has experience or to improve its existing products and offer new generations of those products via the complementary knowledge of the start-up.
Real options theory suggests that early investment results in the acquisition of growth opportunities relative to competitors and a greater ability to expand in the future. Such growth opportunities offering future comparative advantages are called strategic growth options. Growth acqui hires provide the acquirers with strategic growth options since early commitment to the acqui-hire may produce significant preemptive effects.
Employment of the founder and his/her team by the acquirer hinders the rivals’ access to their know-how, thus providing the acquirer with a strategic advantage relative to competitors. However, acqui-hiring a start-up does not completely neutralize the potential threat that it may pose as it is possible that the key acquired employees may leave and launch another start-up or join a competitor. Early commitment of the acquirer into the acqui-hired team ensures the elimination of a potential threat that they may pose by enabling the smooth transfer of their know-how.
Moreover, exercising an option on knowledge-based assets requires that the knowledge must be integrated with other organizational resources. Thus, to exercise the growth options embedded in acqui hires, the know-how of the acquired employees must be successfully integrated. Early commitment to the acqui-hired talent enables the acquirer to smoothly exercise the growth options offered by the acqui-hire by facilitating the integration of the acquired employees’ know-how.
By assigning the acquired start-up’s founder to a high status position the acquirer enhances the motivation and commitment of the founder, thereby preventing him/her from launching another start-up or joining a competitor. Similarly, structural integration enhances the coordination and cooperation among the acquirer and the acquired start-up by providing common procedures, common authority and common goals and aligning the interests of both organizations toward these common goals.
Aligned incentives and interests resulting from structural integration will prevent the acquired start-up’s employees from exploiting a new idea themselves or sharing it with competitors. Finally, early commitment to the acqui-hired team may also produce significant preemptive effects by dissuading competitors from investing in the area of the acquired start-up’s specialization, thus resulting in higher market shares and a stronger competitive position for the acquirer.
On the other hand, early commitment reduces the acquirer’s strategic flexibility, i.e. the ability to adapt its future actions in response to resolution of uncertainty. Making an early commitment in the presence of uncertainty leads to an opportunity cost causing the acquirer to lose the potential to make a different decision once the uncertainties are resolved. When the acqui-hired team is immediately integrated, the acquirer incurs significant organizational costs that result from the cultural alignment of the two firms, loss of autonomy of the acquired firm’s employees and internal resistance from the existing employees.
Moreover, the more the acqui-hired team is integrated with the acquirer, the greater will be the organizational costs of disengagement. The acqui-hired employees and existing employees of the acquirer will develop co-specialized skills and routines over time, increasing the costs of making a different decision upon resolution of uncertainty.
Deferral Acqui Hires
Alternatively, the acquirer may assign the acqui-hired founder to a low status position such as a software engineer or a product manager and leave the acquired start-up’s team autonomous for a while following the acquisition. We present such acqui hires as deferral acqui hires. We argue that acqui hires offer acquirers the privileged rights, but not obligations, to exploit the talented human capital of acquired start-ups to enter new markets and create new solutions. The efforts of the acquired start-up’s founder and his/her team provide the acquirer with some technical and commercial opportunities.
However, while the acquirer has the opportunity to utilize the know-how of the acquired start-up’s founder and team for its existing and novel projects, as the employer it retains the final decision-making authority on whether to invest further in the new solutions created by the founder and his/her team. By opting for a deferral acqui-hire, the acquirer keeps its options open and preserves the right not to pursue the growth opportunities offered by the acqui-hired team if uncertainty resolves unfavorably.
In the case of a deferral acqui-hire, the acquirer adopts a wait-and-see approach and defers the decision of assigning the founder to a high status position and structurally integrating the start-up’s team. There are no immediate expectations from the acqui-hired founder and team, thus the acquirer leaves the team independent initially. However, this form of independence is different from structural separation, which is the preferred strategy when the primary motivation of an acquisition is to obtain a successful product that has a large user base as in the case of Google’s acquisition of Youtube.
In deferral acqui hires, the acquirer waits observing both the acqui-hired team’s performance and the market conditions and then decides whether or not to promote the founder to a high status position and to structurally integrate the team. Moreover, deferring the integration process for a while provides the acquirer with the opportunity to figure out how and where it can best utilize the acquired team’s know-how and skills avoiding the opportunity costs of immediate integration.
During this initial period when the acqui-hired founder and his/her team operate rather autonomously, they learn about the acquiring company’s products, projects and culture while the acquirer at the same time observes their performance and decides how to best utilize their skills. Rather than immediately incurring the costs of a high-level appointment and structural integration, the acquirer waits for arrival of new information before investing further in the acquired start-up. Thus, We argue that a deferral acqui-hire can create value by providing the acquirer with the managerial flexibility to defer the investment until uncertainties are resolved.
Real options theory emphasizes the value associated with deferring the investment in the face of uncertainty and argues that the option to defer or stage investment can be a valuable source of flexibility. Delaying the investment when there is considerable external uncertainty provides management with the flexibility to adapt its future actions in response to resolution of external uncertainties. Thus, We argue that following a deferred integration approach can create value by enabling the acquirer to operate flexibly in response to uncertain conditions.
The efforts of the acqui-hired founder and his/her team provide the acquirer with future growth opportunities, however, the technical and commercial uncertainties surrounding their know-how will be high as the technology they offer is at its earlier stages of development. Thus, although the acquirer gains a strategic advantage relative to its competitors by acqui-hiring the start-up, it may need some time to assess the true potential of the acqui-hired team’s know-how. In this case, it is likely that the acquirer will benefit from delaying its commitment assessing the potential demand for the technology and waiting for uncertainties to resolve.
By deferring the integration process for a while, the acquirer keeps its options open and preserves the right not to exercise the growth opportunities offered by the acqui-hired team if uncertainties resolve unfavorably. Moreover, as a large technology firm, the acquirer most often has many alternative projects that await investment. Thus, as the number of potential alternative investment projects increases, the opportunity cost of committing increases. Deferring the integration of the acqui-hired team provides the acquirer with the opportunity to make a different decision when new information that affects the relative value of investing in the solutions offered by the acqui-hired team compared to the alternative investment opportunities arrive.
On the other hand, deferring the commitment in the presence of growth opportunities may lead to preemption by competitors thus eroding the worth of future growth options. Although deferred integration enables the acquirer to wait for the resolution of uncertainties before making a commitment, not investing immediately may lead competitors to seize the opportunity. The acquirer waits observing both the acqui-hired team’s performance and the market conditions and then decides whether or not to invest further in the acqui-hired team. However, in the meantime the acquirer also delays the development of new solutions.
The likelihood of development of new solutions is low in this case since misalignment of interests and lack of communication between the acqui-hired team and the existing employees may reduce the number and quality of ideas. Thus, time spent in this suboptimal condition may cause the acquirer to lose the opportunity to become an early mover and lead to preemption by competitors.
In sum, while growth acqui hires has the potential to generate value through the strategic advantages resulting from early commitment that produce a significant preemptive effect, deferral acqui hires may generate value by minimizing the opportunity costs of early commitment. Thus, there is a trade-off between potential early-mover competitive advantages and the emergence of potential alternative opportunities. Next, I provide insights into the management of this trade-off by explaining under which conditions the value generated by one of these two acqui-hire types is more likely to dominate the value generated by the other.