‘Acqui-Hire’ Transactions: Their Place in the M&A Universe
What Is An Acqui-Hire?
The purpose of a typical merger or acquisition is to acquire the customer base and other assets of the target company. However, in certain cases — and in certain industries in particular — companies are acquired exclusively for their labor talent. This type of transaction has come to be known as an “acqui-hire,” and technology companies in Silicon Valley have been utilizing this quasi-hiring process for years. The practice is now also becoming more prevalent in non-tech industries throughout the U.S.
When Are Acqui-Hires Used?
Hiring a qualified and proven team can be highly competitive. The demand for top talent in the technology sector in particular often dwarfs the supply. As a result, major players like Google, Facebook, Apple, and Amazon have become creative when recruiting and hiring the most highly skilled employees.
In an acqui-hire, companies onboard an already-cohesive team of employees who have experience working in the acquirer’s industry and who have a specialized skillset. An acqui-hired team is often tasked with a particular project or goal within the acquiring company and given extensive autonomy, which can reduce the time and costs of post-acquisition integration.
How Are Acqui-Hires Structured?
The target companies of an acqui-hire are often startups that were successful in raising initial funds in an early round of financing but were unable to secure additional funds in later rounds, and therefore are low on cash. These companies may sometimes position the startup for an acqui-hire instead of simply closing their doors.
As a result, and because of the nature of the purchase price structure (discussed below), current investors of the target company will typically receive some return on their investment but do not usually get back more than their original investment. Many acqui-hires:
- Are priced on a “per-head” basis. In other words, the majority of the purchase price is allocated to paying for each team member hired in the form of an upfront cash payment, future equity incentives that vest over a period of time (e.g., 3-5 years), or future payments under an employment agreement. The amount allocated per employee can range from a few hundred thousand dollars to $1 million or more.
- Result in the winding-down of operations for the target company. Sometimes, the legal structure of the target company remains intact for liability reasons, or sometimes the entire entity may be acquired so that it doesn’t have to manage a separate winding-down process.
Benefits and Inherent Challenges in Acqui-Hires?
Acqui-hires can give buyers quick access to top-notch, proven teams through a quicker and more simplified deal structure as compared to a typical M&A transaction. As mentioned above, because of the autonomous nature of the team being acquired, buyers may be able to limit the costs of a complex post-closing integration associated with traditional M&A deals.
From the seller’s perspective, an acqui-hire can often be structured to give their investors some return on investment versus a complete write-off and their employees a better landing than they would have had were the company to have simply shut down.
On the flip side, acquiring companies in most M&A deals face an uphill climb when it comes to keeping top talent from the acquired company. Despite the financial incentives intended to keep employees with the buyer for a set period of time, many employees nevertheless choose to find other opportunities.
Moreover, after installing the new team, buyers often still have to contend with lingering morale issues and general integration speedbumps. For some employees, the culture change associated with an acqui-hire is too much to overcome, and they will leave the acquiror as soon as they are able.
Finally, there are numerous pre- and post-closing liability considerations for sellers to undertake (and for buyers to diligence with each particular deal) before entering into an acqui-hire, including ensuring that the board undertakes a fair process in approving the deal, ensuring that the company’s creditors will be paid, and identifying and addressing potential tax issues.
Considering An Acqui-Hire?
Acqui-hire transactions make sense for small companies that have top talent, but perhaps are short on capital. Some companies looking for an innovative edge and an expedited hiring process might find aligned interests with those small companies. The benefits of acquiring a team of proficient employees are many for certain large acquirers, but the prospect of an acqui-hire presents unique considerations that should be addressed and handled by business transaction specialists.
Linden Law Partners has been lead counsel on numerous complex M&A deals. We have helped business owners across a wide variety of industries achieve economic outcomes from high-stakes transactions. Contact us to set up a consultation so we can discuss the options with you and your team.
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