A growing trend of acquisition that is being explored by companies, especially in the technology sector, is acqui-hire. Unlike traditional acquisition where the aim of the acquiring company can be to improve customer base, revenue and cost synergy, obtain intellectual property right of the business to be acquired, improve purchasing power or even diversify its portfolio by introducing new products, the aim of acqui-hire is primarily to gain new talents. Perhaps, it can be described as a unique recruitment strategy where the acquiring company is motivated by the prospect of obtaining the best minds from the acquired company. Much concern is not given to developing the product of the acquired company, and in some cases, these products usually go off the market in the long run. Drop.oi, a file sharing app, which was shut down after it was acqui-hired by Facebook in 2010 and FriendFeed which was discontinued in 2015 by Facebook following its shrinking user base easily come to mind.
To illustrate the distinction between traditional acquisition and acqui-hire, the acquisition of Whatsapp by Facebook with the intention of leveraging on the former to expand the user base of its product and dominate smartphone messaging marketwill be contrasted against the acquisition of Lightbox by Facebook. In the latter, Facebook did not acquire the company per se or the data available on the site, but rather its team for mobile development. From the motive of the transaction, it is clear that the former is a traditional acquisition while the latter is an acqui-hire.
TRENDS IN ACQUI-HIRE
Instances where acqui-hire has been used abound, and they involve mostly technology companies. This is however not to say that businesses in other sectors have not utilised this strategy. McKinsey & Company, a global management consulting firm, acqui-hired VLT Labs because of its team of designers, developers and project managers in 2017. Also, a transport and logistic company in Indonesia, Go-Jek, also acqui-hired C42 Engineering and CodeIgnition, both based in India because of their engineering expertise which would aid Go-Jek set up a research and development centre in India. Nonetheless, it must be noted that a pattern common to acqui-hire transactions is the acquired company being a venture-capital backed startup or a young startup, making it somewhat of a power play between the entities involved.
In Nigeria, traditional acquisition as opposed to acqui-hire is being explored. However, an instance of this transaction is the acqui-hire of Ghana’s Stabus by Plentywaka, a Nigerian mobility startup. Here, Plentywaka, on the invitation of Stabus’ CEO, acquired the company for an undisclosed amount in order to expand into the Ghanaian market, and renamed it Plentywaka Ghana. With the growing number of startups in Nigeria and paradoxically, their likelihood to fail in their early formative years, it is possible we see well-established startups and big tech companies utilise this strategy more.
PROs OF ACQUI-HIRE
Acqui-hire enables a company gain a large pool of trained employees, and as such, is an efficient recruitment strategy. Noteworthy, before the process of acqui-hiring begins, the target company (talents) would have been identified after an acqui-sourcing. Alternatively, the target companies could have put forward a proposal to be acqui-hired. Regardless, it is in the best interest of the acquiring company to undertake due diligence.
In addition, this strategy ensures that the acquired company does not go into liquidation in which case a winding-up process must be commenced. For the founder of the acquired company, it is an easier way to cash-in on their investment, especially where such company finds it difficult to secure additional funding to sustain its operation. In rare cases, these founders move on to occupy important positions in the acquiring company. Sequel to the purchase of FriendFeed by Facebook in 2009, Bret Taylor became Facebook’s chief technology officer. Between being acqui-hired and winding-up, the former is the better option to appear on the portfolio of a founder.
Moving on, an entity that also has an interest in an acqui-hire transaction especially where it concerns a venture-capital based startup is the venture capitalists. Capital is the blood that fuels the operation of businesses, but startups sometimes struggle to secure adequte capital. Venture capitalists come in here as individuals, organisations and financial institutions that provide financing (including technical and managerial expertise) for emerging or small businesses that show great growth potential, in exchange for equity in that establishment.
CONs OF ACQUI-HIRE
However, it is not all rainbow for acqui-hire transaction. In reality, it is usually an arduous task for the acquiring company to keep off these sets of employees from exiting the company. A report found that 47% of employees acqui-hired leave the company within the first year and 75% by the third year. A blogger had this to say;
‘Employee retention is abysmal; the buyouts often leave the startup founders with millions in their pockets, who have no problem sticking around for their earn-out, before saying “adios” and moving on to found another startup.
Additionally, when companies acquire startups purely for their engineering talent, they don’t always offer jobs to the original founders behind the startup. If those founders move on to start a new venture and ask their old engineering buddies to come along, many may consider it.’
Moreover, energy is expended on integrating the new team into the existing team. However, this downside is not very weighty since this problem can also exist following a regular recruitment. It can also be the case that the acquired company becomes an additional branch of the acquiring company (satelite office) in which case business continue as usual, but with the team working on the project of the acquiring company. An example here is Plentywaka Ghana already mentioned above.
THINGS TO CONSIDER IN AN ACQUI-HIRE TRANSACTION
Acqui-hire can be a worthwhile option available to gain influx of trained persons, particularly in sectors where the demand for skill outweigh supply. In the view of a writer, ‘For #bigtech companies to stay on the cutting edge, they often find that acqui-hiring a startup with ten engineers is a faster, better return on investment than hiring onesies on a drip-feed basis.’ Accordingly, it behoves on companies to engage the service of a legal practitioner(s) to mitigate some of its risks. Some of the issues that can be considered are;
1. Employee Defection: The acquiring company can consider having a release agreement to ensure that employees to be hired are released, a payment structure for the new employees, or even a trade restraint agreement (non-compete clause), amongst others. For the record, a trade restraint clause is at first blush unenforceable in Nigeria, but can be enforced if it is for the protection of a business interest, is reasonable, not contrary to public interest, or does not exceed a period of time.
2. The Deal Structure: Although an acqui-hire is principally to acquire new set of talents, it could also include a transfer of intellectual property right and the acquisition of the share capital of the acquired company. This depends on the overall objective of the acquiring company, and will determine the shape such acqui-hire will take.
These are not exhaustive of matters to be considered for a transaction of this nature. Others include one of the certainties of life (tax implication), credit satisfaction (including how to deal with the debt portion of an acquired company, but this depends on the structure of the acqui-hire deal), post acqui-hire liabilities, and so on. Again, it will be in the interest of each party to engage the service of a legal practitioner(s).
RECOMMENDATION
Acqui-hire transaction is a viable option to be considered whether a company is looking into having an experienced team work on a specific project or a company is experiencing difficulty securing additional funding. Either ways, there are numerous issues to be considered, some of which have been mentioned above. As with other corporate transactions to be conducted, legal advice should be sought.
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