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Retaining Key Employees is Crucial for Successful Acqui-Hire

During mergers and acquisitions, companies must develop and implement effective employee retention strategies to avoid compromising intended deal value.

June 2024

by Tareq Fattul

Retaining key employees is important for any organization. They possess valuable knowledge and critical skills that often serve as the foundation of an organization’s competitive advantage. The time and money spent onboarding and developing an employee is long and expensive. Organizations typically spend $7,500 to $28,000 in hard costs [1]. However, it becomes most critical during an “acqui-hire” - when one organization purchases another, primarily or in part, to acquire talent. 


Some of the biggest companies in the world acqui-hire frequently. Apple CEO Tim Cook made headlines in 2019, saying that Apple acquires a company every 2-3 weeks, usually for talented engineers. Google has made over 200 acquisitions since its founding in 1998, the vast majority of which have been acqui-hires. [2]


Retaining key employees during an M&A event is critical to minimizing unnecessary risk. 33% of acquired employees leave in the first year of acquisition [3], but ultimately, the true measure of success is whether the most critical talent from the acquired company remains on board. When deal valuation realization depends on retaining key employees, failure to retain them is not an option.


Fear and uncertainty increase

in M&A environments


Cognitive psychology is dedicated to understanding the way people think. Factors like emotions, experiences, and cultural background influence one’s cognitive perspective. This is more than relevant during an acquisition. It creates organization-wide anxiety and uncertainty, resulting in workers scrambling to make sense of the future and what it means to them. Both the target and buying entities undergo significant shifts, including leadership changes, new management styles, and the consolidation or relocation of offices, which disrupts commuting patterns and often requires staff relocations.


Organizations must understand the impacts of these changes and mitigate the risks associated with each by implementing strategies to retain key talent. There isn’t a one-size-fits-all approach, so leaders must tailor an approach that accounts for their unique circumstances.


Build a cohesive and inclusive culture that embraces both aspects of the merging organizations.


When considering the human element in M&A, it is essential to first acknowledge and understand the cultural differences between the two entities. While employees must adapt to working with new colleagues, an acqui-hire deal makes this adaptation even more crucial. The primary goal is to integrate the acquired talent seamlessly into the acquiring company's workforce. 


“Culture is to humans collectively what personality is to an individual.” 

Hofstede



Here are 3 steps to effectively capitalize on cultural elements:


1. Define the culture you’re aiming to build


All acqui-hire deals should start with a vision. Having an agreed-upon vision for the organization is critical during an acquisition. Defining the target culture is more than creating a mission statement. It’s inspiring, modeling, and reinforcing specific shared behaviors across the company. It’s important to note that key acqui-hired employees typically view themselves as innovators. When shaping the company culture, make sure the acqui-hired talent has a platform to continue their creative work.


2. Assess the cultural gap


Conduct a thorough cultural assessment to ensure a smooth cultural integration. Interview managers, senior leaders, and key employees to gather insights on what they like and dislike about their company's culture. Compare and contrast these insights with your current culture, focusing on identifying aspects that positively or negatively affect the organization. 


Next, compare and contrast. Below are a few examples.


  • What are some of the aspects of the culture that will positively or negatively affect the company’s current culture?

  • What are some of the aspects of my current culture that need to remain the same or change?

  • How does this align with the cultural vision of the company?


Soon, a theme in stakeholders’ answers will emerge, giving you more insight into what needs to be enhanced and what doesn’t. 


3. Create your plan


Now that you know your organization's culture, the acquired organization's culture, and the target vision, create your integration and communication plans. Begin by facilitating planning and informational workshops across all departments. Next, conduct frequent touchpoints with team members at every level, from first-year associates to senior leaders, to ensure effective communication and provide visibility into plans and progress. Last, offer employee development opportunities to support growth and adaptability. Making this an organization-wide effort supports alignment and an efficient transition. 


The importance of straightforward and frequent communication is magnified with acqui-hired talent.


Leaders must consistently uphold transparency during the integration process. Transparency is fundamental to fostering a high-trust environment and a high-performance culture. Being open with key personnel is not only likely to be appreciated but is also ethically important. How can leadership create a high-trust environment amid high levels of fear and uncertainty? It starts with effective communication.


The 2023 State of Business Communication report notes that 72% of business leaders believe effective communication increases team productivity, and 86% of leaders dedicate budgets to improving communication [4]. No one argues that communication is unimportant, but in an acqui-hire environment, communication can be the difference between success and failure. Successful communication addresses these two human considerations.


1. Reduced uncertainty about the future


The direction of the acquired company and its people will evolve, and in some cases, the roles of these critical members won’t be the same as before. This can be challenging for the creatives who invested countless hours in challenging roles and are working on growing their acquired entity. Leaders can’t afford to lose these innovators, their unique skillset is the main reason behind the acquisition in the first place. Executives must thoroughly explain the direction of their roles and the rationale behind key decisions. Lastly, reassure the team that their efforts haven’t gone to waste and highlight exciting opportunities for innovation. Take the time to fully understand what these employees are feeling and present alternatives that better suit them. To close the loop, acknowledge that you’ve heard and understood your employees' points of view by repeating them back.


2. The need to feel part of the mission


Organizational leaders must explain the value they see in these key employees. Above all, communicating their importance to the business objectives allows them to feel the sense of belonging that humans desperately desire. In 1995, Roy Baumeister & Mark Leary argued that the need to belong is a fundamental human motivation. They argued that humans have an inherent desire to form and maintain interpersonal relationships and that the need to belong is just as essential as basic needs like food and water [5]. Humans have an intrinsic desire for connection and validation and without it, they become unmotivated. 


Using these strategies during acquisitions can significantly reduce employee turnover. People need to feel understood and valued and know how their contributions help drive the company towards its objectives. They also want to understand the opportunities and rewards that may lie ahead.


Recognize and reward key talent with incentives, career development opportunities, and clear paths forward within the new organizational structure.


Retaining key employees can be especially challenging, given the increased number of options they may have - the cultural and communication strategies above may not suffice. Critical employees are typically 5% of your workforce and keeping or losing them will either make or break the deal [6]. For these top 5%, retention agreements may be the best way to mitigate the risk of losing them. 


“Talent is the multiplier. The more energy and attention you invest in it, the greater the yield” — Marcus Buckingham. 


Implement individualized contractual agreements with key talent to acknowledge their value to the team. Many startup employee policies offer a range of dynamic contractual agreements such as stock options and spot bonuses. Rather than forcing newly acquired employees to conform to your organization’s standard agreements, cater to them and ensure they feel valued. 


Typical retention bonuses amount to 10% to 15% of an employee's annual compensation [7]. Senior-level employees often receive larger bonuses, which are determined by their specific skills and the organization's needs. Key talent retention packages in some contracts are contingent on employees remaining with the acquiring organization post-deal closure, with most bonuses payable within 3 to 12 months, although terms can extend to 24 to 36 months depending on employee needs [8]. Protecting organizational knowledge is not a cheap task, but it’s a must.


Creating and implementing an effective employee retention strategy enables merging entities to reach their intended deal value. While this plan requires tailoring to each organization, there are steps companies can take to mitigate the risk of important talent leaving. Make it a priority to strategize and implement these tactics prior to the deal announcement. 








About us: mXa, on the 20+ year foundation of Method360, was founded to intentionally serve fast-growth companies and the unique challenges they face. We understand that inorganic and organic growth provokes change, ambiguity, and uncertainty that can deeply burden the organizations involved. By seeking to understand the human element in M&A and fast growth environments, mXa embraces a unique, contrarian approach in advising clients that seeks to realize maximum value for them in alignment with business objectives.


Interested in learning more about our capabilities or discussing your M&A or People Transformation story? We’re here to help.



Sources:


  1. "Cost of Onboarding Calculator." BambooHR, https://www.bamboohr.com/blog/cost-of-onboarding-calculator.


  2. Clifford, Catherine. "Apple Buys a Company Every Few Weeks, Says CEO Tim Cook." CNBC, 6 May 2019, https://www.cnbc.com/2019/05/06/apple-buys-a-company-every-few-weeks-says-ceo-tim-cook.html.


  3. "Your Acquired Hires Are Leaving. Here's Why." MIT Sloan Management Review, https://mitsloan.mit.edu/ideas-made-to-matter/your-acquired-hires-are-leaving-heres-why.

  4. "State of Business Communication Report 2023." Grammarly, https://go.grammarly.com/state-of-business-communication-report-2023.


  5. "M&A Stay Bonus: Retention Incentive." Exit Strategies Group, https://www.exitstrategiesgroup.com/ma-stay-bonus-retention-incentive.

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