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Your acquired hires are leaving. Here’s why.

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Large companies often acquire startups to eliminate competition, absorb new innovation, and buy up skilled workers.

But new research from an MIT Sloan doctoral candidate shows this “acqui-hiring” strategy is not as effective as some would believe.

According to Daniel Kim’s paper, “Predictable Exodus: Startup Acquisitions and Employee Departures,” within the first year of a company’s acquisition, 33 percent of acquired workers left, compared to 12 percent of regular hires with similar skills and work experiences. While those percentages tend to level off over time, in the three-year window Kim studied, acquired workers were 15 percent more likely to leave than new hires.

In the first year after an acquisition, companies retained 88 percent of regular workers — and 66 percent of acquired workers.

Read the abstract

“People who work at startups join a startup for a reason,” Kim said. “Primarily they want to be in a very entrepreneurial, scrappy organization. But once they get acquired by a big firm, that is in direct opposition with the preferences that they have.”

Kim used employee-employer matched data from the U.S. Census Bureau to build a dataset of 4,000 high-tech startup acquisitions in the U.S. between 1990 and 2011. Those acquisitions brought a collective 350,000 startup employees to new companies.

“Frictions in external labor markets often limit employers’ abilities to identify and hire talented workers,” Kim writes. “In contrast, by acquiring a startup, employers can find and bring in a high-quality team that has already been proven to work together effectively.”

Organizational mismatch

The reason for the exodus of acquired employees can be traced to organizational mismatch, Kim said.

A larger, more established firm has varying levels of bureaucracy and a formal corporate culture. A startup, Kim writes, is typically for workers “who prefer risk-taking and autonomous work environments.”

Startup employees targeted for acquisition, particularly non-founding individuals, don’t get to choose who buys them, and even if they know who the new owner is going to be, they don’t usually get to make decisions on organizational changes. That lack of choice creates an organizational mismatch that leaves acquired employees looking toward the door.

And because these are entrepreneurial people who don’t mind being on the ground floor of something new, they’re also more likely to leave and start competing businesses of their own.

“What really needs to be paid attention to — before the merger, before the acquisition — is whether or not a firm should acquire ‘Company X,’” Kim said.

Analyzing employees

Kim said he noticed a pattern where acquiring firms that hold patents are less likely to lose employees — and of those employees who do leave, they are less likely to start companies in the same sector.

While a company can’t stop employees from leaving after an acquisition, there are some steps buyers can take to better predict how things will go, Kim said.

First, understand what kind of company you have. Do your current employees come from other startups? Or do their employment histories include more established businesses? Examine this to determine if you run an “entrepreneurial firm,” Kim said.

Then, apply that same analysis to the company being considered for acquisition. While you might not be able to see the same restricted-access census data as Kim, there are other sources that can help a company learn more about its potential hires, like LinkedIn and internal human resources records.

“You need to understand who you are as an organization,” Kim said, “and you need to understand [who] you’re buying.”

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