How can technology companies unlock more value from tech and talent acquisitions?
Think tech and talent deals should be treated like any other acquisition? Think again. Technology companies need to take some unique steps — from diligence to integration — to unlock value.
Tech and talent transactions, in which a target is acquired to obtain specific talent or intellectual property (IP), are a common, agile and swift way leading tech firms advance their capabilities. While these deals offer strong potential, companies often destroy value during the deal process.
So, how can technology companies get the most value out of tech and talent acquisitions? Focus on the main sources of value in the deal throughout the deal life cycle: the technology and talent.
Where should you focus diligence?
Financial, tax, commercial, legal and other traditional diligence should be performed for any deal type.
Before signing a technology deal, technology diligence should include the buyer’s legal advisors and technologists, and answer the following key questions:
- How scalable is the target’s technology?
- What functionalities does the technology enable?
- Does the target actually own the desired IP?
- Does it have the appropriate licenses for IP that it does not own?
- Has the IP been adequately protected?
- Is the target using any open-source software?
- Have any exclusivity provisions been granted to third parties?
- What domestic and foreign patents (and patents pending) would be acquired?
- In what jurisdiction does the legal and economic ownership of the IP reside?
When you’re buying the technology, invest in understanding its capabilities and limitations before you seal the deal.
How should you value a tech and talent acquisition?
Success or failure of a deal is generally relative to the consideration paid, so getting the value right is half of the battle. When valuing a target in a tech and talent deal, dealmakers should start by separately valuing talent and IP.
The talent valuation should include all acquired personnel, not just a select few key employees. The talent valuation should also include the retention structure designed during the diligence, and factor in the total cost of both retaining and separating employees.
IP value often is estimated using a replacement-cost approach. This approach is based on the premise that a prudent investor would pay no more for an asset than its replacement or reproduction cost. And it should include the direct costs incurred to construct a similar asset of equivalent utility, as well as the indirect cost (support functions), which is a reasonable profit mark-up on the development costs and opportunity cost.
In addition to the tech and talent, companies should consider tax attributes as a potential source of value. In a stock deal, this may include the value of the net operating loss or R&D credits. In an asset deal, it may include the value of a tax amortization benefit.
Have you considered the tax impact of your deal structure?
Buyers often underestimate the impact (both positive and negative) that the tax policies can have on a deal’s economics. The deal should be structured in a way to optimize the tax footprint, while considering the operational realities of the structural choice.
Once the structure is determined, the sale and purchase agreement (SPA) should clarify the deal perimeter in terms of IP, talent and other assets included in the deal.
What’s the right degree of integration?
Integration can seem like an underwhelming endeavor when you’re buying a relatively small company with little corporate complexity. Buyers should resist the temptation to snap the target immediately into the buyer’s operating model, but instead design an intentional integration plan with timing aligned to the deal’s desired purposes.
The combined product road map should be a top priority for the first 100 days after the close. Some level of integration of the R&D and product management organizations is often required to design and achieve the combined road map. And technology integration generally is part and parcel with human capital integration.
Employee-related integration can be planned and communicated well before the deal is closed. In tech and talent deals, the loss of key individuals can erode all planned value and leave the buyer with nothing but impairment charges and acquisition fatigue. An effective change management program that provides strong leadership and a focus on both individual and organizational needs is a must.
Buyers should lock in the commitment of the key leaders prior to close and ensure they clearly understand their go-forward roles. Communication of the retained leaders will help with the change management efforts for the broader employee population.
Getting the “small stuff” right is essential – like determining which perks are valued and if retaining them may help keep the target’s employees from jumping ship. Free gourmet lunches or game rooms not offered by the buyer can be seen as a culture clash and a reason to leave. Be wary of eliminating intrinsic motivators.
What really matters: people and technology
The goal of tech and talent deals is to grow the business and create value. Success in these deals can’t be measured with simple profit and loss (especially when there is no revenue or profit coming with the deal), so buyers will need to design a scorecard that accounts for metrics like retention, product road map milestones and the broader use of IP in the buyer’s portfolio.
Buyers contemplating or executing a series of tech and talent deals should think through the institutionalization of the knowledge gained and build a playbook for a repeatable process. Further muscle memory will be gained by identifying functional resources (R&D, product management, HR, back-office functions) who will repeatedly work on deals.
Don’t fall into the common traps that deteriorate value: insufficient technology and human capital due diligence, paying more than the company is worth or destroying value by alienating key talent. Companies should focus on bridging the gaps where cultural differences are most pronounced. Remember, in tech and talent deals, the people and the technology are the only two things that really matter.