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The new code for M&A integration success

How non-tech companies can acquire tech firms and keep talent

You’ve taken a bold step to acquire a tech company and accelerate growth. But while you may know your own industry inside and out, this is a different kind of deal, and the way you’ve handled previous acquisitions and integrations probably doesn’t apply.

Determining a tech target’s value, combining organizations and retaining the people who make the company attractive mean doing things differently than in a typical acquisition. And it’s even more critical as the COVID-19 pandemic has sped up digital transformation at a wide range of businesses. For your non-tech company to capture value in a tech acquisition, consider these actions at each stage of the deal process.

Acquisition

Navigating new deal dynamics

Buyers and sellers often have different views on what a business is worth, and that gap can be exacerbated when non-tech acquires tech. Given that, it’s better to agree on a price sooner rather than later. Key considerations include:

  • Pay for performance. The valuation gap could lead to significant performance-based incentives to retain key players after the deal closes (i.e., earnouts). Increasingly, these incentives are tied to metrics to encourage the continued innovation or effectiveness that prompted your acquisition in the first place. And your due diligence should include assessing the tax impact of any earnouts, from both a purchase consideration perspective as well as an employee compensation perspective.
  • Mind the ticking clock. Time-to-close could be quick and dictate employee communications and the timing of payroll and benefits integration. If the tech target is part of a professional employer organization (PEO), employees may need to move onto the buyer’s platforms — e.g., payroll, healthcare, 401(k) — on Day One.
  • Expand diligence to culture. Many acquired tech companies are startups or founder-led businesses with cultures that are very distinct from their non-tech buyers. Incorporating social listening data and other employee-based insight into your due diligence can provide an early indication of potential culture pitfalls that could erode deal value.

Integration

Managing what should and shouldn’t change

This is where non-tech buyers can stumble. Compared with traditional acquisitions, it’s more vital to retain as much of a tech company’s culture and identity as possible so it continues to excel in the nimble, innovative manner that attracted your attention. Here’s how:

  • Maintain small and agile leadership with clear governance. The tech firm’s success was likely built on taking risks, failing fast and adapting quickly. You don’t want to lose that speed just because there’s a new corporate parent that wants to be involved.
  • Be flexible with what works well. If the tech business has always had weekly off-the-cuff stand-up meetings with the CEO, for example, you might want to preserve that culture even if it’s not part of your overall communications strategy.
  • Preserve the tech company’s identity. Successful buyers often avoid rebranding the acquired tech company and instead retain its individuality (or combine it with similar tech acquisitions) with separate goals, metrics and compensation. The employees who give the company its value likely prefer and thrive in a startup environment. These employees are probably extremely sharp, and some may have deliberately chosen not to work for a large corporation. Maintaining separation can also mean fewer compensation and benefits comparisons between the parent company and the acquisition. 

Retention

Rethinking incentives and culture

Retaining talent is at the core of any tech acquisition, but keeping employees during integration has become increasingly difficult. In our 2020 M&A Integration Survey, only 10% of executives reported significant success in retaining employees — way down from 45% in the 2017 survey and 56% a decade ago. Success today can depend greatly on how you identify and engage key employees during the transaction. What you should consider:

  • Agree on how much to spend. Tech firm leaders know who their key employees are. In the spirit of autonomy, they should help select who receives the most lucrative rewards, and a mixture of cash and equity often is preferred. Keep in mind that the impact of employee departures is greater when non-tech buys tech since buyers generally don’t have a deep bench to replace talent.
  • But it’s about value, not just money. Tech workers are often ambitious but also socially conscious and increasingly vocal with concerns about such things as environmental, social and governance (ESG) issues. Learn their passions and deal-breakers; your company's leadership on these issues can be as important as money in retaining employees. The best retention mechanism may cost nothing, especially for those who can easily walk away. In one acquisition, for example, the acquiring company gave its profit and loss responsibilities to the CEO of the acquired company, and that executive stayed for three years without any financial retention package. To articulate a clear value proposition, ask yourself why they should work for your non-tech company. What do you have that other tech firms don’t?
  • Keep culture top of mind. A defined culture roadmap can highlight the employee experience and show the tech firm’s employees that the larger corporation won’t simply engulf them. Tech businesses value more transparency in communication and little bureaucracy with less rigorous executive oversight. Be wary of mandating “ways of working” or eliminating nontraditional benefits and perks such as charitable contributions. And after the COVID-19 pandemic supercharged remote work, reassess your in-office rules. If a tech worker wants to bring a pet to the office or work barefoot, that could be fine.
  • Plan for the next generation. Your acquisition could put you in competition with established tech giants for talent, and you’ll need to tailor your recruiting efforts accordingly. Onboarding should be swift; startup employees don’t need a full week when they want to be doing valuable work on Day One. Your tech acquisition is an opportunity to build a reputation as a dynamic workplace for the best and the brightest.

Contact us

John D. Potter

Deals Clients and Sectors Leader, PwC US

David Baral

Managing Director, Deals, PwC US

Kurt Ewen

Partner, PwC US

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