Acquisitions are often celebrated in the press. But academic research suggests that 70 percent to 90 percent of mergers don’t succeed, owing to a wide variety of factors. Buyers overvalue the synergies they’ll derive, or they underestimate the impact of the associated costs, or they rely too heavily on assumptions about where a market is heading.
Of course, another reason acquisitions don’t always go as planned is that founders often leave a year or two after their company has been gobbled up.
That’s changing in today’s challenging market for exits, where a growing number of well-funded companies and their investors are hoping that if an IPO isn’t in the cards, an acquisition might be. And in addition to other changing deal terms, acquiring companies are seemingly thinking long and hard about locking up talent longer than they have in the recent past.
You saw it happen when the e-commerce company Jet sold to Walmart for a whopping $3.3 billion in August. According to Recode, cofounder and CEO Marc Lore agreed to stay on with Walmart for an atypically long five years as part of the acquisition agreement. In fact, according to that same August report, if Lore leaves before the summer of 2021, he’ll forfeit a sizable amount of both cash and stock that could otherwise earn him up to an estimated $1 billion.
Lore may be exceptional in many ways, including his understanding of e-commerce and how to compete specifically with Amazon, which acquired his previous company. It’s easy to understand why Walmart wants him around. He probably won’t be alone, though.
Steve Fletcher, a managing director at the global investment bank GCA, notes that it’s “hard to say” whether it’s universally the case that management teams are getting locked into longer contracts with acquirers in this market. “I don’t think anyone has a large enough sample size to say that,” he notes. But he adds that of the deals he is seeing, there is a move to sign on incoming talent for a longer period, sometimes “three or four years as opposed to [the previous standard of] 18 to 24 months.”
Vas Natarajan — an investor at the venture firm Accel Partners who focuses on products and services that target developers, designers and media creators — makes a similar observation.
“In the last four or five years, there’s been a rash of these acquir-hires, where the founders have left after 18 to 24 months,” Natarajan says. “But I know from talking with heads of product and corp dev teams [that they are now asking], ‘How can we do it in a way that’s much more retentive than in the past?’ M&A teams are starting to think more about structuring things in a way that you retain what you buy.”
How big a trend this becomes is far from clear. As a baseline, SRS Acquiom, a San Francisco-based outfit that provides M&A post-closing services to companies, says that 21 percent of the 735 private M&A transactions it saw between 2012 and 2015 featured an earn-out period of four to five years. Meanwhile, 47 percent of those deals featured earn-out periods of 1 to 2 years.
Founders who are more driven to start companies than reap their full reward from an acquirer will surely leave no matter the earn-out period anyway.
Still, there’s reason for corporates to believe that longer agreements make sense.
In 2013, PayPal, then a division of eBay, acquired the Chicago-based payments gateway Braintree in an all-cash deal worth $800 million. As part of that deal, the incentives of Braintree CEO Bill Ready were structured over a long period of time.
In retrospect, that decision looks to be paying off for Ready and PayPal — which spun off into its own public company last year. As of September of last year, Ready was already running all product and engineering at PayPal. Just this week, he became the first person since it became an independent concern to be named to the role of chief operating officer.