Introduction
A major factor for competitiveness in the technology and innovation industry is the quality of a company’s human resources—the skills, experience, and expertise of its people. Human capital is directly linked to innovation, which strengthens a company’s market position. This is why talent acquisition, management, and retention are some of the biggest challenges in the rapidly evolving technology ecosystem. Addressing this challenge, Microsoft finalized a deal with Inflection, an AI startup, in March 2024. This deal allows Microsoft to utilize Inflection’s models and onboard most of the startup’s employees.
Inflection AI, a prominent player in the generative AI space, had previously raised $1.3 billion from Microsoft and Nvidia through a combination of cash and cloud credits, reaching a valuation of $4 billion and attracting over 1 million daily active users. The deal, which closed for approximately $650 million in cash, enables Microsoft’s Azure cloud service to leverage Inflection’s high-profile models and hire its employees, including the co-founders, as Microsoft seeks to consolidate and expand its offerings to subscribers. These deals illustrate the growing adoption of the acquihire strategy and how it operates.
Understanding Acquihires
The term ‘acquihire,’ derived from the words “acquire” and “hire,” has been prominent in the tech mergers and acquisitions space for the past few years. It is mostly adopted by Acquirers whose strategic goal is to acquire the human resources, skills, or talents of the Target Company rather than its products or other assets. Typically, an acquihire does not signal the end of the target company. In many cases, the target company is managed as an independent entity and continues its operations with the support of the acquihiring company, ensuring its growth and profitability.
This talent acquisition strategy bypasses the often arduous process of recruitment, training, and development from scratch in a tech ecosystem where the competition for talent is fierce. In some instances, struggling startups, rather than facing reputational or managerial failure, have accepted an acquihire bid to mitigate losses. This allows founders to gracefully exit the startup or reframe their venture as a story of success or business transition rather than a colossal failure.
Key Legal Considerations
There are a number of key moving parts that must be considered by both the acquihiring company and the target company from the standpoints of due diligence, transaction planning, merger review and regulatory compliance. A few key considerations are highlighted below:
Competition and Anti-trust Considerations
When reviewing acquihire transactions, competition and antitrust considerations are critical to ensure that the acquisition does not stifle market competition or create monopolistic conditions. Regulators closely examine whether the transaction could lead to an undue concentration of market power, particularly in industries where talent is a key competitive asset, such as technology. A significant concern is whether the acquihiring company’s acquisition of a large portion of skilled employees might limit innovation and reduce consumer choice.
Additionally, the potential impact of discontinuing the target company’s product offerings in the relevant market is a matter for merger review. Regulators assess whether such discontinuation could lessen or distort competition by reducing the availability of products or services, thereby disadvantaging consumers and other market participants. This is particularly relevant if the target company’s products had a unique or competitive position in the market.
Antitrust consideration also generally extends to the horizontal effects of the merger, where regulators evaluate whether combining the Acquihiring Company and the Target operating in the same market could reduce competition by creating a more dominant player. This assessment includes the potential impact on smaller competitors and whether the merger could create barriers to entry for new players. The deal could also be regarded as a restrictive contract if it imposes conditions that limit the ability of the Target Company or its employees to engage in future business activities. For example, non-compete clauses or agreements that restrict the use of acquired skills or technologies by other market participants could be seen as anti-competitive because they practically inhibit the free flow of talent and innovation.
Labour Law Issues, Stock Options, and Employment Agreements
When considering acquihire transactions in Nigeria, various labor law considerations come into play regarding the rights and protections of employees being acquired. In an acquihire, the acquiring company must undertake a comprehensive review of existing labour law obligations both for the purposes of pre-transaction due diligence, and also for post-acquisition compliance planning.
Care must be taken to properly review all contracts of employment to assess each team member’s status and employment agreements, understanding whether the employee has a stock option in the target company, when and how it vests This review should also consider the mechanics of acceleration, especially in a liquidity event, where stock options may vest more quickly or fully, impacting the overall compensation and equity structure. It is also crucial to determine whether an employee is full-time or part-time, whether they are on probation, or have been confirmed as a full-time employee. Additionally, it is equally important to ascertain if there are any external consultants retained by the target company and the company’s obligations to such consultants.
While collective bargaining agreement are not common in technology startups in Nigeria, it might be relevant to consider the existing obligations of the target company under any collective agreements or trade union representation that may affect the employees’ rights.
Keyman Risk and Founder Value
In an acquihire transaction, the founders and investors of the target company often play important roles and may be the primary targets. Although the founders typically lead the transaction, it is crucial for the acquiring company to obtain a release of claims from the target company, its founders, and investors. This should cover any potential financial repayment obligations, ensuring that these are factored into the fees to be paid at or before closing.
Beyond this, the acquiring company must carefully assess keyman risk – considering the potential impact on the business or the team if key founders or other essential personnel were to leave. Some acquihiring companies have adopted a combination of vesting arrangement and lock-in provisions, requiring key individuals to commit to staying with the acquiring company for a certain period post-acquisition. This ensures stability during the transition and helps retain the valuable expertise needed to drive the acquirer’s long-term goals. Separately, it is important to evaluate whether the founders are indeed the most valuable talents to acquire, and whether their skills and expertise align with the acquirer’s long-term business goals. Where the acquiring company seeks to retain the founders, the founders’ willingness to remain involved and active commitment to the acquirer’s future strategy and long-term growth are very critical.
Target Company’s Products, Services, and Intellectual Property
In an acquihire transaction, the primary focus for the acquiring company is often the human capital of the target company, with less emphasis placed on the target’s products, services, and intellectual property (IP). Typically, these assets are considered of little or no value in the context of an acquihire, leading the target company to isolate its products, services, and IP from the transaction and dispose of them separately as it sees fit.
However, it is advisable for the acquiring company to consider wholly acquiring the target company’s IP and related products. This approach safeguards against the risk of another buyer acquiring the IP or remaining assets of the target company and potentially taking legal action against the acquiring company for the use or exploitation of patented processes, software, or other proprietary technology. One practical advantage of securing these assets is that the acquihiring company can avoid future disputes and protect its interests.
Managing Contractual and Liability Risks in Discontinued Product Offerings
The acquiring company in an acquihire must conduct a thorough review of all active contractual relationships the target company is involved in. This review is particularly critical in situations where the acquirer has no intention of continuing the target company’s product offerings. In such cases, it is essential to carefully assess the potential liability issues that may arise from discontinuing services to the target company’s users or from existing contracts where the target company has committed to delivering its products or services.
Terminating or renegotiating the terms of these third-party contracts should be a key consideration for the acquiring company to avoid incurring liabilities for causing the target company to breach its obligations. Additionally, a comprehensive liabilities review is necessary to ensure that the target company has no outstanding liabilities beyond those disclosed. This due diligence is vital for protecting the acquiring company from unexpected financial burdens and legal risks associated with undisclosed or unresolved obligations, especially in the context of discontinuing the target company’s operations.
Concluding Remark
Acquihire is a relatively new concept that is evolving in response to changes in the market. In Nigeria, acquihires may become more common as the tech talent market has been significantly affected by recent immigration trends, with a continuing wave of manpower flight.
The strategic shift of attention on human capital in acquihires, rather than relying solely on traditional justifications for business acquisitions, indicates a growing trend that is likely to become more pronounced. While this overview is not exhaustive, it provides basic insights into this emerging sub-area of mergers and acquisitions.