The Art Of The Acqui-Hire

Amid the hot market for talent in the tech industry, companies may look to acquisitions to solve their hiring needs. The “acqui-hire” transaction—the term coined to describe an acquisition where a key driver of the transaction is to hire a group of employees—has long been a fixture of the tech M&A landscape. The opportunity to bring on a group of employees who in many cases have worked together as a team for a long time and have a proven track record of success can be a very attractive proposition for tech companies struggling to hire workers in a competitive job market or who are looking for workers with a scarce skill set.

However, the term acqui-hire can be used to describe a wide variety of M&A transactions that fall along a broad spectrum–ranging from a simple hiring action that can be completed with minimal execution time and cost, to a far more expensive and time-consuming acquisition of an entire company. While all acqui-hires have one key objective in common, namely hiring employees, it is largely the other objectives of the transaction that dictate the form an acqui-hire should take.

• The Simple Case. If bringing the employee team on board is the only objective of the buyer, then the transaction would typically consist of a simple agreement between the buyer and the target company. In this simple form of transaction the buyer makes a payment to the target company, and in exchange the target company agrees to (1) give the buyer access to the relevant employees in order to offer them employment with the buyer, (2) release any employees who accept employment with the buyer offer from any noncompetition, confidentiality or similar obligations to the target company that might restrict their ability to work for the buyer and (3) waive any claims against the buyer relating to the buyer’s solicitation and hiring of the applicable employees.

There is no rule of thumb for the size of the payment to be made to the target company—the amount will usually depend on the particular facts and circumstances involved. For instance, the target company may intend to wind up its operations following the transaction, in which case the payment would need to be sufficient to pay the target company’s creditors, negotiate contract terminations with customers and vendors and complete the winding up process. If the target company has investors, the payment may need to be sufficient to satisfy their expected return on investment so that they will not object to the transaction. There may also be competition from other companies who are interested in hiring the team or acquiring the company, which would impact the amount the target company is willing to accept from the buyer.

• More Complex Cases. If the buyer is also interested in acquiring the business of the target company or a narrower set of assets of the target company, then a different structure would be used. While a thorough discussion of the tax, accounting and legal considerations to be taken into account in deciding on a particular structure is well beyond the scope of this article, it is worth highlighting some of the considerations relating to the most important categories of assets held by a technology company aside from its employees, namely intellectual property and contracts.

• IP Considerations. The buyer may want to acquire technology and intellectual property developed by the relevant employees being hired. For example, the buyer may see independent economic value in these technology and intellectual property assets and may specifically want to include them in its own products and services. In other cases, the buyer may want to acquire these technology and intellectual property assets principally to avoid claims by the current owner or a future owner based on the exposure of the relevant employees to those assets.

Even if not a focus of the buyer’s plans, the members of the team may naturally want to re-use work that they previously created, and to do so without the appropriate rights to the IP would put the buyer at risk of an infringement or misappropriation claim. The buyer may insist on obtaining ownership of the technology and intellectual property—particularly where the buyer wants to obtain enforceable, exclusive rights in those assets or to ensure that there are no limits on its exploitation of those assets. In other situations, where the technology and intellectual property is more of a “nice to have” and not core to the buyer’s plans, the buyer may be satisfied with a broad license, which enables the buyer’s planned uses of the technology and intellectual property but falls short of outright ownership. Even in the simple structure described above, it is common for the buyer to obtain at least a license to the technology and intellectual property relevant to the team being hired in order to avoid potential misappropriation or infringement claims in the future.

Lastly, when the buyer acquires ownership of the relevant technology and intellectual property, it may be necessary to grant a license back to the seller, so that the seller has the rights it needs to operate any retained business, to finish performance under any existing contracts that are not transferred, and/or to wind up its affairs. The interplay between assignments and licenses of relevant technology and intellectual property can be quite complex and require careful negotiation.

• Contract Considerations. If the buyer is interested in conducting all or some portion of the business of the seller following the transaction, the buyer may also want to acquire certain key contracts related to that business. These could include licenses of technology or intellectual property, favorable supplier arrangements or even customer agreements. In the most common forms of acqui-hire transactions, the buyer is acquiring individual assets and not an entire company. In that structure, every contract must be analyzed to determine whether it can be assigned to the buyer or whether consent from the other contracting party is required for the buyer to take over the contract from the seller. Conducting this due diligence exercise and seeking and documenting contractual consents can be time-consuming and expensive, and if consents are required for contracts that are material to the valuation of the transaction, those consents can create uncertainty about closing the deal.

To use a transportation analogy, an acqui-hire can be anything from a scooter to a luxury sports car. The trick is determining which vehicle is best suited to the trip the buyer wants to take, and whether greater flexibility and added features are worth the additional cost and complexity.