In their new book Talent Wins, McKinsey’s Dominic Barton and Korn Ferry’s Dennis Carey argue that incidences of buying companies for the talent they possess are only likely to increase as the ‘war for talent’ intensifies.
“So called acquihires – the process by which a big company typically buys a smaller one just for its talent, not its products or revenue – should be among the tools in your arsenal,” they say.
Except it’s not always so straightforward. Indeed, it’s far from uncommon for many of the best people to leave their startup once they’ve been acquired. It’s a process that a recent study from UT Dallas urges companies to avoid at all cost.
“Many technology firms acquire another firm, not only to get the assets from that firm, but to get the technology that they have developed and to acquire the talent that they have — the people who invented the technology,” the authors say. “To develop new technology from scratch is prohibitive for most firms, so when they need to catch up with new technology, the quickest thing they think of is to acquire a small firm and integrate them.”
Failing to transfer
Whilst the logic is sound, the reality is often less fruitful, with up to 80% of acquisitions destroying value rather than creating it. The researchers believe that retaining the talent from the startup is crucial to ensuring that the acquisition is successful.
The researchers examined over 111,000 patents recorded after over 300 high-tech acquisitions over a ten year period to 2,000. Alongside this, they examined who created the breakthroughs, and the track record of the buying company in retaining key scientists.
A couple of conclusions were reached. Firstly, when the knowledge being acquired is tacit in nature, or difficult to explain, it’s much harder for that knowledge to be transferred to the buying company without the knowledgeable individuals there.
“There’s no manual on how to develop the technology, and even if the acquiring firm has the technology and can use the technology, they’re not going to be able to use it to develop subsequent technology,” the authors say.
So when the knowledge is hugely complex, it’s vital that the target scientists are retained, but much less so when the knowledge is broadly similar to that of the existing knowledge in the acquiring firm.
If you have an element of redundancy in that knowledge however, it can easily create political wrangling among the scientists, with a ‘not-invented-here’ syndrome emerging.
Keeping talent on board
One strategy the authors recommend to alleviate the problem posed by key talent jumping ship is to make that an express condition of the acquisition. It’s increasingly common for engineers to have to sign a contract prohibiting them from quitting in the aftermath of the takeover. It’s a crucial reminder that talent is often the most important aspect of any takeover and shouldn’t be underestimated.
“Technology doesn’t typically stand on its own,” the authors conclude. “Most technologies out there have to be brought in together with the people who invented the technology. The companies have to retain those engineers. At the end of the day, technology and people have to go together.”
Barton and Carey advocate transparency from the off about how fully the new talent will be integrated into the buying organization. Some companies will largely leave the startup team as they were, whilst others want to sprinkle this stardust across their legacy innovation teams.
They argue that regardless of the strategy you take, you will need to give it due consideration long before the merger is even proposed. For instance, it’s crucial that the acquired company has a sponsor to fight their corner internally. The buying company must also have clear expectations for the talent they’re bringing on board, especially around things like cultural fit. Lastly, the communication with the new talent must be exemplary, especially as they come from a much smaller environment where bureaucracy will be less of an issue.
They hypothesize that the best companies at achieving this have a HR presence in the board room, and have talent as a fundamental part of any M&A activity. Suffice to say, this isn’t a start point that many companies begin from, but with talent becoming increasingly important, perhaps it’s high time that HR take its seat at the top table.