By Robin Emond (Muang Thai Life Assurance
$4.28 trillion: this is what companies spent worldwide in 2015 in Mergers and Acquisitions. Yet, between 50% and 90% of Mergers and Acquisitions fail to achieve their objectives. This means a huge loss of money. Moreover, Mergers and Acquisitions are an important part of many companies’ strategy. Therefore, such a high rate of failures raises important concerns.
From the end of the 20th century until today, motivations behind Mergers and Acquisitions have changed drastically. Once only motivated by economies of scale and market power, they are now motivated by many other reasons such as acquisitions of new technologies. In this area, technological start-ups are a source of innovation and value. Uber and Airbnb are leading the unicorn start-ups. But there are not only big names; there is also a myriad of small players which are very innovative and still cheap enough to be acquired.
Motivations to enter into a M&A deal can be regrouped into two main categories: Exploitation and Exploration. These concepts can be defined as follow: “the essence of exploitation is the refinement and extension of existing competencies, technologies and paradigms (…); the essence of exploration is experimentation with new alternatives”.
An interesting topic to understand how to fight this high failure rate is the post-acquisition integration. During that phase, academics have highlighted an important challenge that faces every acquirer: the Integration-Autonomy dilemma. Acquirers have to integrate the acquired start-up in order to create value using coordination mechanisms. However, they also have to give autonomy to the start-up to preserve its innovative capacity. In other words, they need to integrate and give autonomy at the same time, which seems to be antagonistic.
The academic literature suggests that a 2-step model can be used to minimize the risk of that phase. If a start-up is acquired for exploitative reason integration should be pursue because this will be the best choice to reach the synergies that are looking for in exploitation. On the opposite, if a start-up is bought for explorative reason, autonomy should be given to let the start-up keep its innovative spirit. A third option exists when a start-up is acquired both for exploitation and exploration. In that case, a period of autonomy should be followed by integration.
Some specific actions can be taken to reduce the negative impacts of integration (e.g. create common ground, retain key employees) or create value in autonomy (e.g. Nurturing, protecting boundaries). One which is very interesting is the retention of key employees. Indeed, start-ups are built on tacit knowledge that key employees possess. Therefore, losing them would be a big blow to the start-up innovativeness.
Analysing the acquisition of two start-ups, namely PeakMeUp and Qustomer, my study revealed two key results:
First, the level of integration is not a binary variable. Therefore, the question is not really whether or not to integrate but should be specific to each areas of a company (e.g. sales, marketing, R&D, etc.).
Second, I discovered that retention of key employee seems to be even more important in the case of a start-up due to its small size. However, it seems that sometimes it is impossible to retain some people due to their personalities and their desire to be entrepreneurs. This raises questions about the actions that can be taken to retain that kind of people.
Implications for managers
From the above results, some recommendations can be expressed.
First, it is of upmost importance for managers to identify the main reasons behind an acquisition. The framework of exploitation/exploration can help. This is crucial to the success of the acquisition because, depending on the motivations, more integration or more autonomy should be pursued.
Second, managers should go deeper into the choice of integration or autonomy. They should identify which specific areas need to be integrated and which ones should be left autonomous. This is, for example, the case when the start-up is left autonomous. Managers should, then, identify how the start-up can be nurtured to make it grow faster than if it had not been acquired.
Third and last, sometimes it is clear that retention of key acquired employees is not possible due to their profiles and personalities. This is especially true in a start-up environment. Thus, managers at the acquirer firm should focus on the transition to ensure the continuity of the business. Financial incentives are necessary to keep key acquired employees in the game but it should be complemented with something else. Helping them to be entrepreneurs might be a way to keep them in the company.
Overall “one-type fits all” does not exist when it comes to dealing with post-acquisition of technological start-ups. Each situation should be assessed individually and level of integration should depend on the motivations. Moreover keeping key employees are of upmost importance, at least to ensure the transition.
The findings exposed in this article are based on the master thesis of Robin Emond who studied two acquisitions (PeakMeUp/Efficy and Qustomer/ING). For More information, please contact Robin Emond – firstname.lastname@example.org
About the author
|Robin Emond Robin Emond graduated in 2016 in Management and International Business from the Louvain School of Management. His interest in start-ups started during his internship at Muang Thai Life Assurance, a life insurance company in Thailand. It motivated him to write his master thesis on the following topic: “How to solve the Integration-Autonomy Dilemma during the acquisitions of technological start-ups”.|