Acquihires – CorpDev, HR and R&D beginning to mesh

Acqui-hiring, typically acquiring a company for the target’s engineering talent, is very much the flavor of the day. Acquihires are not especially new, but major tech companies have accelerated the pace of acquihiring dramatically. Part of that is due to the apparent shortage of mobile-engineering developers. In the case of Yahoo, it is largely driven by the desire to reinvigorate the ranks of the company and rejuvenate the reputation of Yahoo as a fun, exciting, happening place to work. Just this year Yahoo has acquired Astrid, GoGoPoll, Milewise, Stamped, OntheAir, Snip.it, Alike, Jybe, Summly, Astrid, GoPollGo, Milewise and Loki, most of which are acqui-hires. Twitter, Facebook, Groupon and others have done the same.

Some decry acquihires as elimination of entrepreneurship, others celebrate acquihires as a way of allowing early investors to get their money back, mostly, and of allowing entrepreneurs to leave failing companies with their egos intact.

Two opinions merit particular attention, in our opinion.

First, Coyle and Polsky’s paper on acqui-hires in Duke Law Journal suggests that acqui-hires serve an important function in improving mobility of engineers; it enables engineers to leave a sinking ship without the appearance of leaving the sinking ship. To continue with the analogy – the whole ship is plucked out of the water, the crew is rescued, and ship is tossed back in.

Second, Mark Suster, general partner at GRP Partners, has written a particularly thought provoking blog on acquihires. Suster explains that acquihires are highly demotivating to current employees.

Acquihires are not necessarily M&A. Typically an acquihire deal is some form of asset purchase and employment agreements. However, a big part of the value of an acquihire is that it gives the entrepreneur and investors some PR protection, allows them to write ‘acquired by’ on their CV, and gives the veneer of success to what is essentially a job change. That’s real value to them and to industry, as it allows them to get back to the tough work of starting innovative, disruptive and risky ventures.

It may well be that with time the line between acquihire and M&A will be blurred; companies will be acquired for their great talent, but acquirers can give them a chance to build out their product. If it flies, the acquirer reaps the benefits, if not, it has the talent. This will give new significance to human resources being a company’s most valued resource, i.e. putting people front and center, a long term trend in tech environment. The lines between HR, CorpDev, R&D are blurring more and more with time. It looks like acquihires will evolve, but that they are a part of the evolution of resource allocation efficiency within companies, and as such represent a welcome increased awareness in the way people – employees – create value at companies.

Premortem of Acquisitions

Daniel Kahneman won the Nobel Prize for Economics in 2002, and is one of the most influential thinkers of this generation. In his recent book Thinking, Fast and Slow, this giant of behavioral economics addresses the world of M&A. Kahneman discusses optimism and overconfidence in business leaders, and how this effects companies and markets. Kahneman quotes a study by economists Malmendier and Tate that shows that optimistic CEOs – measured by the amount of stock they personally owned in the company – took excessive risks; for example, they were more likely to overpay for acquisitions, and to “undertake value-destroying mergers” (p.258).

Kahneman writes that “beliefs in one’s superiority have significant consequences. Leaders of large businesses sometimes make huge bets in expensive mergers and acquisitions, acting on the mistaken belief that they can manage the assets of another company better than its current owners do. The stock market commonly responds by downgrading the value of the acquiring firm, because experience has shown that efforts to integrate large firms fail more often than they succeed. The misguided acquisitions have been explained by a “hubris hypothesis”: the executives of the acquiring firm are simply less competent than they think they are.” (Daniel Kahnman, Thinking, Fast and Slow, 2011, p.258).

How can this common leadership fault be addressed? Part of the problem is that when senior management, especially a CEO, is excited by an M&A deal, it’s a rare and brave soul who stand up and say “this deal sucks”. Groupthink is very, very powerful. It’s what stopped people from preventing failures from Titanic and Pearl Harbor, to the Challenger and Deepwater Horizon. In the world of business, people rarely die from a failed M&A deal (happily, or business would be dangerous), but optimism and groupthink behave in just the same way. At organizations from the CIA and NASA, to Lehman and AIG, professionals are making faulty risk assessments and no one, not even the people whose job it is to do so, looks them in the eye and says ‘this is bad’.

For the world of M&A Kahneman says Gary Klein has the best solution, though it is only a partial remedy: conduct a premortem. When considering an acquisition, pretend now that the deal closed and you’re a year in the future, and the deal was a complete disaster. Now, write a brief history of this disastrous deal. A premortem allows – in fact requires – every member of the team to voice their doubts, to identify pitfalls, and this enables the acquirer to take at least some of the necessary steps to avoid the pitfalls they’ve anticipated.

Merjerz is doing something similar – instead of just requiring a few executives to suspend reality for a minute and find ways to tell their boss that she’s doing a stupid deal, Merjerz enables people who have no qualms or restrictions, no social barriers, to voice their opinions. This is the best way (we know of) to fight hubris, optimism and over-confidence in M&A.