M&A drivers: Tech, talent, and small company culture

By: Asish Ramchandran and Ami Louise Rich

The urgency both to gain new tech capabilities and tap tight talent pools is becoming more deeply embedded in corporate acquisition strategy. We are seeing this trend in both Deloitte’s sixth annual M&A trends report as well as with the transactions our clients are involved with.

In Deloitte’s 2019 M&A trends report, 15 percent of corporate respondents named technology acquisition as the most important aspect of their M&A strategy, a drop of 5 percentage points from Deloitte’s 2018 report. Amid rising prices for tech companies, one could view this as a pivot away from acquiring firms simply for their technology. Still, the survey showed that a significant part of this decline came from a shift in the survey responses of those in technology, media, and telecom (TMT). In the TMT sector, 17 percent cited acquisition of tech capabilities as their top M&A driver, down by almost half from a year earlier.

A more important trend may be that corporate leaders—across industries—see how M&A deals inevitably reflect the imperative to access needed technology. They are no longer as likely to name it as such: Technology acquisition simply is a given.

The top corporate M&A priorities for the coming year, according to the survey, are to expand and diversify products or services (cited by 19 percent) and expand customer base in existing geographies (20 percent). But a further drill down into deals that have products, services, or customer growth in the deal thesis indicates technology is embedded in all of these transactions.

Often, the technology that enables the product or service or the customer growth is what’s actually being bought—the artificial intelligence (AI) to revamp a customer service function, the big data analytic capabilities to streamline supply chain decisions, and so on.

Talent in a tight labor market

Along with the imperative to apply M&A strategy to technology needs comes the desire to use it to corral tech talent. In many scenarios, the pool of people being acquired—the acquihires—may justify the purchase price on its own. We’ve seen this in a string of recent diligence efforts for our clients.

It’s not hard to understand how an industrial company in the middle of the country or a global consumer products maker might have disadvantages when it comes to recruiting Silicon Valley software engineers—and might therefore opt for buying an entire company and its people. Talent acquisition as an M&A driver goes well beyond the tech skill set, however.

As US unemployment hovers around a two-decade low,¹ companies are getting more creative in how they find new employees with the skills they need. This year for the first time, we offered corporate respondents the opportunity to select acquiring talent as the primary corporate driver for M&A, and 12 percent say that factor will be their main motivation for striking deals in the year ahead.

Keeping the people (and the culture)

With talent being key to M&A strategy, cultural integration becomes vital. If the buyer gets the technology or product or service it wants but loses the engineers who designed it or the founders behind the vision, the value of the deal can be diluted almost immediately.

Tensions can naturally arise between larger acquirers and the smaller firms or start-ups they buy. Simply praising people and offering retention bonuses will likely not be enough if the acquired employees are being asked to now work entirely within the larger organization’s generally less efficient legacy systems and processes.

Deliberate steps to create an atmosphere to foster talent retention should be taken during the acquisition process. Leadership should ask: What aspects of the culture of the company being acquired matter most? How can these things be protected and preserved? What specific actions need to be taken to enhance the cultural fit?

It’s important to understand that access to leadership and fast decision making are characteristics of a smaller, nimbler company. An effective integration process will examine how that can be replicated or encouraged in the combined organization. We’ve cataloged tactics that help preserve key features of start-up culture—and keep target company employees engaged. Nothing erodes trust more quickly than abandoning the products, brands, or the founders who created them.

If deal success hinges on realizing the full value of both the technology and the talent acquired, then integration planning becomes more important than ever. And integration planning must include a strategy for culture. This is something that at one time was left to happen organically, but now it’s too important to be left to chance.

¹ Source: U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 20, 2021.