[Now on-demand] How to Leverage M&A as a Strategic Growth Lever?

Why has Acqui-hiring risen in Popularity?

The Rise of the Acqui-hire

The competition to win the best talent is fierce these days, especially in the IT sector where there are fewer top candidates than what the market demands. To combat this supply-demand mismatch, corporations have started turning to more inventive measures of recruitment such as acqui-hiring.  Acqui-Hiring is the process of buying a company with the objective of securing the personnel within it.

The past few years have seen an exponential rise in acquihires in India amongst small companies as well as well known tech giants however, the concept wasn’t new. It has been here since 2005 and had become quite popular in 2010 among VC backed startup companies. This method was followed heavily by companies such as Twitter, Yahoo and Google. One such well known deal was done by Facebook in 2009 when it acquihired FriendFeed that helped Facebook scoop up many Google alumni, one of them being Bret Taylor who ended up gaining the CTO title just a little while after the deal.

Even with a high number of successful deals in the past, the sudden hype in the idea can be attributed to certain reasons such as:

Fierce Competition

Fundraising is a difficult aspect of starting up any business. While initial investments are scrutinized heavily by investors and require patience, raising further investments means even more scrutiny and patience. For startups and other small businesses, the value created through an M&A can provide a plethora of opportunity and accelerated growth. Whether a buy-side or sell-side company, you can build upon your revenues and customers, bring in new technology and knowledge, share resources and cut costs where unnecessary. An M&A could provide the very opportunity to strategically scale up while ensuring benefits for the long term.

Impact of COVID-19 Pandemic

The pandemic forced companies to digitise themselves.  The digitization created the need to have efficient systems in place in terms of day to day activities as well as data security. This led to increased demand for skilled IT personnel and created an inevitable gap between demand and supply of tech labor. Many companies saw this as an opportunity to acquire data analytics, product development, data security, etc startups to optimize their overall functioning and costs.

Saves Time

As mentioned previously, recruiting the correct person for a role is costly and lengthy. When a company is looking to appoint an entire new team for entirely new projects, that would take even more time. In such a scenario, acqui-hiring would be one of the fastest ways of hiring a good volume of employees with proven skills. This method also saves the time it would have needed to train the employees had the company gone for traditional recruitment. Acqui-hired employees already have required skills and have worked together and the familiarity increases comfort

Eradicates Competition

A lot of times companies that are looking to expand in different verticals or business offerings find this a great method to pursue. Even when a company identifies gaps in its supply chain that can be filled by a smaller company, acquihire serves as a good way to do that. They are able to get an entire team along with the right leadership and existing supply chain or customers to make the growth process quick.

Some of the examples of deals done in the past in India include: 

  • Practo Technologies acquihired Enlightiks, a healthcare analytics solutions company in 2016 and gained 50 engineers with Machine Learning and Deep Learning capabilities
  • Facebook too acquihired an Indian startup Little Eye Labs that created software tools in order to analyze the performance of apps on Android
  • In order to strengthen their supply chain capabilities, Swiggy acquihired a Bangalore-based Asian food ordering platform, 48East and  Myntra acquihired InLogg, another Bangalore-based startup about two years back.

2021 alone saw over 250 acquisitions and acquihires in India

Some of these very well known ones are:

  • Instamojo acquihired Showman, a Bangalore based virtual theatre and indigenous content platform, and gained its CEO Kshitij Bhatawdekar as Product Manager and COO Rutveez Roopam Rout as User Research Manager
  • HealthifyMe acquihired Under45 in order to expand its services to booking vaccination slots online
  • NeoKred acquihired PeSeva Technologies, a BNPL solutions provider, in order to build new as well as expand current lending solutions of the company in terms of B2B financial products.

GrowthPal is a unique digital investment banking company in India with a AI/ML based deal origination platform. digital investment banking platform. We have been working in the industry from 2020 and making it easier for both Mid and Large Size Companies engage with early or mid stage startups to explore such opportunities.

Having reached to more than 9,500 companies, Spending over 600 hours speaking to over 1,200 sell-side companies in many different sectors like new-age technologies, Consumer goods, EdTech, FinTech, Healthcare, IT, Cybersecurity and Digital Marketing; Growthpal is taking every step to make Acquisitions and Acquihires an easy to achieve process for both the buy and sell side and has closed 8 acquisition and acquihire deals in a short span of time. 

There are endless reasons for a company to pursue acquihiring when on the buy-side. It would be beneficial to look at the reasons for a company to get acquihired as well :

Talent May Not Always Be Enough

A business does not run on talent alone. Without proper strategy, marketing or connections, gaining success is really difficult and almost next to impossible. Very talented individuals with great expertise too may not be able to scale up a business and therefore require the help of a bigger company. Even though the name gets dissolved, the aquihired company and its team gain experience, credibility and the chance to be a part of something bigger.

Soft Landing For Dying Startups

It is not a remote possibility for a startup to fail within the first 5 years. For any startup in distress, acquihire can act as a saviour since it not only gives a fair valuation based on the team expertise instead of just the revenues but also helps the team, along with the founders, be a part of another bigger entity. The new salary is generally higher and the jobs are secure.

The rise in popularity was somewhat inevitable. India however, is still a long way from achieving an increased deal closure rate.

Most of the acqui-hire deals in India end up failing in the later stages due to a mismatch in buyer seller perspective

Some of the reasons seen by Growthpal have been:

Valuation Mismatch

 Buyers want to pay the least amount while sellers demand the highest possible valuation. Buyers don’t see the clients and internal products of the sell-side companies as a valuable resource and want them ignored. The sell-side company however sees it as proof of their capabilities and a source of future cash flows. An ESOP exchange too is not always seen as a wealth generator and preference is given to cash. Due to these differences, deals are often not valued by both parties and fail. 

Dissatisfactory Roles

Bigger companies usually play the buy-side in an acquihire deal. This often means that the senior or the core team in the smaller sell-side company does not receive the same status in the hierarchy of the new company. The founders themselves, coming from an entrepreneurial mindset, aren’t happy with the new roles offered and the deals end up not going through.

Full team was Not Onboarded 

The buy-side companies often handpick the employees that they want as a part of their new team. This is unappreciated by the sell-side company and unfair to the team fraction that doesn’t get selected. The deal at this stage is dropped.

The Mindset 

The mindset In India about acqui-hiring, in general, is not that positive. The buy-side in India sees it as a way to quickly get a good team, without realizing that it is not just hiring taking place through HR. The sell-side on the other hand do not see it as valuable and respectful, having to leave higher status in their company and work as an employee

Conclusion

The pandemic may have caused a hit on most of the industries, but it only made the tech industry boom exponentially all over the world. Acqui-hiring comes with its own set of pros and cons but it for sure is here to stay. It can act as a blessing for both parties when the deal is correct or as a curse when things don’t go as planned, however, the risks are worth it. It has become indispensable for the big corporations to look at this method and even for smaller companies that are the targets. If the challenges faced in deal closure are addressed and resolved, we see that the reasons for the rise in popularity are enough to assume that the hype may just rise a lot more in the near future.

Reach out to our expert M&A consultants for more information or contact us directly at [email protected] to learn about what we can do for your company. 

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