Does Acquihiring Lead to Better Outcomes in the Technology Sector?

Acquihiring – purchasing a firm to acquire its technical talent – can be an efficient way to reduce costs of acquisition while assembling a knowledgeable, functional, and effective team.

The recent rise in mergers and acquisitions (M&A) in the tech sector has resulted in increased acquihiring. A critical determinant of the value of such a deal is the quality of the acquired firm’s human capital. Although acquirers have multiple motivations behind each deal, a principal strategic aim is the acquisition of new talent.

To learn whether acquihiring is a successful approach to deepening and extending an acquiring firm’s talent, Analysis Group Managing Principal Jee-Yeon Lehmann and Senior Advisor Jeffrey Cohen spoke with Professor Toby Stuart of the University of California, Berkeley’s Haas School of Business. Professor Stuart told us what his research reveals about the impact of acquihiring on the labor market for high-tech talent.

Why do firms choose to acquihire? Do companies see this as a way to fast-track innovation?

Toby E. Stuart: Professor and Leo Helzel Chair in Entrepreneurship and Innovation, and Faculty Director of the Lester Center for Entrepreneurship, Haas School of Business at the University of California, Berkeley

Yes. The labor market for certain types of technical talent is very tight in certain geographic areas, especially in the Bay Area. Organizations understand that incorporating stable, well-functioning teams through acquisition can accelerate the formation of a productive talent base in areas that extend the existing know-how of the acquiring firm. 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.

Yours is the first systematic analysis of the outcomes of acquihires. What made you interested in this question?

Until recently, researchers have not paid much attention to the impact of M&A on labor market outcomes. They have focused on the acquisition’s impact on the product or the service market. My research was motivated by a suspicion that many large corporations may overpay for talent acquisition given the rates of labor mobility in tech. While the benefits to the acquired are obvious, I’ve wondered about the payoff of these types of deals for the acquirers. M&A transactions are difficult to study – outsiders 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, we could 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 program 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 create counterfactual career trajectories that serve as a baseline comparison group for acquihires.

Jee-Yeon Lehmann: Managing Principal, Analysis Group

Your research findings indicate that turnover rates of acquihired employees are much higher than those of organic hires. What factors do you think contribute to this?

Many 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. Acquisition may create mismatches between preferences of acquihired employees and the jobs post-acquisition. Also, acquihires have typically held equity at their startups, so it is likely that they financially benefited from the acquisition. These financial payouts can create incentives for employees to leave.

A number of recent legal and regulatory challenges and discussions related to competition in the labor market have examined acquihiring’s direct impact on workers and 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 might major tech firms use acquisitions to preempt emerging competitors from competing down the road?

Certainly competitive dynamic considerations have been 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.

Jeffrey Cohen: Senior Advisor, Analysis Group

Many workers in the tech sector are bound by non-compete arrangements.

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.

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 by creating potentially lucrative exit opportunities. 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.

You have collected and analyzed a staggering amount of resume data for your research. How challenging was that process?

Until recently, we have not had sufficiently powerful algorithmic methods to gather and analyze such a large amount of data. These days, we can employ a number of data science techniques to approach this kind of problem. 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. ■

Adapted from “Does Acquihiring Lead to Better Outcomes in the Technology Sector? A Q&A with Affiliate Toby Stuart,” AnalysisGroup.com