Once upon a time, in the age-old, gritty world of business mergers and acquisitions, the focus was on acquiring companies in order to get its patents, property, products, processes, power or prestige. Think of AT&T acquiring Bell South in 2006 for $83 Billion and Exxon acquiring Mobile in 1998 for $80.3 Billion. The advertising industry used serial mergers to achieve a global presence, attain substantial influence over media, and offer a full range of marketing services to international clientele. In some cases, corporate acquisitions have been used to keep patents out of the hands of those who might be tempted to assert them against a mega corporation. But, while companies still want to acquire innovative institutions and inventive ideas, corporate acquisition efforts have taken an odd and interesting turn in the 21st century. Instead of buying the competition’s better widgets or customer base, today’s mega corporations are acquiring companies just to get its employees.
Big business has begun acquiring companies – sometimes lackluster startups — just to get the staff who work there. The world of corporate acquisitions has expanded into the realm of recruiting and HR. It is perhaps the ultimate confirmation that a company’s greatest assets are its people. But this approach is now becoming a common – if not a common sense — approach for tech giants fighting to hire the most brilliant leaders, engineers and programmers in the world. The real question is whether this approach to talent acquisition is effective and can it work for other industries too? Does it make sense to spend money – sometimes big money — buying a company in the hopes that the talent will stay long-term? And does that mean, in essence, that companies are selling “human talent”?
“Trapping” Top Talent
The fight for top talent is nothing new. Companies have been vying for the best leaders, managers, rainmakers and innovators probably since before the first businesses in recorded history were established over 1,500 years ago. And paying big money to lure top talent is certainly nothing new either. CEOs of multi-national corporations have been lured from company to company by huge salaries for decades if not centuries. For example, Mickey Drexler, known as both the Merchant Prince and the Turnaround King, was CEO of Ann Taylor, then later Gap and most recently J. Crew. But buying entire companies – lock, stock and barrel – just to get its most brilliant brains is an approach that is gaining momentum.
Case in point. Tech startup Snapchat — an image messaging and multimedia mobile app dreamt up by Evan Spiegel and Reggie Brown as a class project at Stanford University in 2011 — recently purchased tech startup Vurb for $200 Million. While $200 Million may not seem all that interesting for the purchase of a tech company, it isn’t until one hears that Vurb’s product – a search engine that suggests experiences to users — has not really taken off. Half of the money went toward retention of Vurb’s staff. In particular, it was reported that Snapchat was especially interested in Vurb CEO and founder Bobby Lo, who got $75 million in retention pay to keep him with the company after the acquisition was completed.
Interestingly, Snapchat itself was the target of an unsuccessful acquisition attempt by Facebook founder Mark Zuckerberg in 2014. Whether Zuckerberg was after the successful app — which crushed Facebook’s identical app Poke – or he was trying to acquire Snapchat’s talent is unknown. But, given that Zuckerberg’s offer to purchase Snapchat for $3 Billion was at a time when Snapchat had yet to generate a single dollar of revenue indicates that perhaps Zuckerberg was after both the product and people.
Obviously, the “acquisition” of Vurb’s Bobby Lo by Snapchat assures that Lo stays with Snapchat at least for a certain amount of time. But, eventually, after a period of probably 2-4 years, Lo will be able to leave Snapchat and go on to do his own thing, if he so chooses. The question is whether it will have been worth it for Snapchat to pay $75 million to snap up Lo for a few years and whether Lo will bring something of that value to Snapchat. After all, how many programmers and engineers could Snapchat have hired for a few years with $75 million? Perhaps over 100? It is impossible to know if one or many of those new hires could or would have been as or more brilliant than Lo. In the recruitment game, how much a company pays for talent — and whether that talent is worth it — is the ultimately gamble.
For innovative and high-tech companies that see growth through new products or services that don’t have close substitutes, highly-talented individuals are instrumental to their existence. Innovative tech giants of Silicon Valley – such as Google, Twitter, LinkedIn, Snapchat, Whatsapp and Facebook — require a regular influx of the same brilliant technical talent and entrepreneurial inspiration that gave birth to those companies in the first place. Dave Sobota, Google’s Director of Corporate Development, said “Talent deals are a horribly expensive way to get talent–10 to 100 times as much as we’d pay a recruiter. But it’s a necessity.” For Snapchat, valued in February 2016 at $16 Billion, paying $75 million for Lo’s talent was just a drop in the bucket. But, does buying companies for the talent make sense for companies that aren’t in the tech sector or valued in the billions? What are the pros and cons?
- The company doing the hiring doesn’t have to settle for the best talent available on the market at a given time, or hire an inexperienced recent graduate, or wait for an individual to leave his/her current company. A corporate acquisition allows a company to immediately acquire the exact talent they need to do the job.
- The company doing the hiring benefits from a team that has synergy. Research shows that significant innovative advancements are often produced by teams who are used to working together and work well together.
- For the company being acquired, if desire to merge is arising from financial or other troubles, then it is better to be acquired by another company than fold. It allows the employees being acquired to save face and preserve reputation.
- For the company acquiring another company, it can be very expensive; up to 100 times the cost of paying a recruiter to identify the same talent.
- After a period of time, that talent can leave whether they delivered enough value to the company or not.
- For the marketplace, the merger or companies can decrease entrepreneurship by collecting some of the most promising serial entrepreneurs inside corporate structures, eliminating competition.
Of course, it often makes sense for a large company to acquire small mom-n-pop shops and capture both their clients and talent in one fell swoop. That can deliver enough benefit to offset the cost. But if the only acquisition is talent, companies would do well to make sure that what they get more than offsets what it will cost to do the deal.
Quote of the Week
“Hiring the best is your most important task.” Steve Jobs
© 2016, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.