Do "Tuck-In” Acquisitions Actually Work?

With all of the Yahoo and Microsoft blog commentary going around, I’ve been thinking a lot about M&A and whether the so-called “tuck-in” acquisition where a major Internet company purchases a smaller company for $25 to $100 million and rolls them into the larger fold. The logic for most of these deals is that the acquired team can bring expertise and technology that the acquiring company does not possess. And, at the tuck-in level, most of these acquisitions are not expected to become large, standalone lines of business.  I’ve been reading a handful of executive comments and press releases around the “logic” for these investments and I have a few thoughts about the whole tuck-in acquisition process:

[Disclaimer – I’ve never been part of a company that was acquired and tucked-into a larger organization. These are just some observations and thoughts based on what I’ve read and conversations I’ve had with people who have gone through the process.]

1. Can you retain the core members of the founding team? – Central to most of these acquisitions is a belief that the team and the user base (and to a lesser extent the technology) being acquired is really what drives the value of the deal. If tuck-in acquisitions are to work under the logic above, retaining the team has to be a core part of the strategy.

I have no empirical evidence as to what percentage of start-up teams stick once they get acquired. Anecdotally, I do think that keeping teams together helps keep people interested in staying at the company. I also think the amount of money at stake and the way it’s paid out has to matter – if someone made a killing and got most of it up front, that person might not be nearly as interested in staying on with the parent company after the sale. Lockups, earnouts, and vesting can help, but I’m not sure that’s a panacea.

2. The founding team, once retained, has to be able to actually influence the direction of the larger organization – This one seems to be the piece that you actually have to get right and something that people don’t talk about nearly enough. If you’re a 10,000+ person company and you buy a company with fewer than 100 people, it’s unlikely that those people will be able to move the culture needle or bring their insights on the market if they’re not in a position to actually influence strategy.  It seems important to me that you need to put the newly-acquired folks in a position where they can actually make a difference.

The challenge here, in my opinion, is that being an executive at a large company is likely a different job than being a senior person at a start-up. You have more people to manage, more people with whom to communicate to get things done, and are generally in a very different operating environment. I’m not sure that this is ever a smooth transition and it’s clearly a transition some people simply aren’t interested in making. I’m not sure that there’s a magic formula for getting this right, but I do think you have to get it right to get the culture / perspective benefits that many of these mergers tout.

The other approach, which is to leave the smaller entity as a standalone unit also seems like a mystery. True, folding them into the larger organization runs the risk of breaking the special magic of what allowed the smaller entity to succeed. However, if part of the logic for the deal is that the small company can influence the product direction and perspective of the parent company, I struggle to see how allowing the acquired company to operate independently serves that goal.

3. It’s really hard to have people working side by side where one person’s salary is 10x that of his or her co-worker – “acq-hiring “companies can lessen this blow – If these deals are about talent acquisition, you could (theoretically) pay the folks you want to acquire a sufficiently high salary to get them to quit their start-up and join the larger company. I don’t think this actually works in practice, though – there are lots of reasons beyond salary why people prefer being in smaller companies as opposed to larger ones. That being said, I do think pay and compensation can (obviously) influence where people want to work. So why not just pay the folks you really want what it takes to get them from a salary and benefits standpoint?

The obvious answer is that you can’t do it in most companies – you can’t pay one person X and pay the person sitting next to him or her 10X as it looks and probably is really unfair. Buying the company for a modest amount of money amounts to a large signing bonus, as many other bloggers before me have pointed out. I’m not sure this necessarily makes for easy relations between employees at the acquiring company and the newly-acquired company.

It’s clear to me that these tuck-in acquisitions are unlikely to go away and I’ve been noodling on this topic for a few days. Feel free to post comments if you have something to add.