In this search for alternatives for growth and with money in the pocket, the path of acquisitions has proven inviting, whether to add new products to the portfolio (such as Ebanx when acquiring Remessa Online, which added the product of international remittances), enter new verticals of the economy (for example, Dr. Consulta, when it acquired Cuidar.me, which debuted in the health insurance market) or to add talent to the existing team (the well-known acqui-hire).
The phenomenon that sounds like a new department in Human Resources actually refers to acquisitions (acquisition) focused on hiring the company's staff. It has been common in the US for a few years now, with Facebook and Yahoo as one of its most notable and recurrent practitioners, as well as other companies like Airbnb with Dailybooth, Google with Milk, and others. In Brazil, it has become more recurrent due to some factors as explored below. We recently saw a case disclosed by Brazil Journal regarding the acquisition of Beta Learning by Clear Sale, when the CEO of the acquirer stated that the acquisition was not focused on any specific product, but rather on the quality of the company's staff team, and the methods of training and education of the workforce..
Capital in surplus, shortage of human resources
In contrast to the capital irrigation scenario, companies have suffered from a shortage of qualified human resources in the labor market, especially in the technology area. The world and the economy are transforming into increasingly digital concepts, but it seems that universities and training centers have not been able to adapt fast enough to meet this demand in the training of professionals.
Still in the mentioned Brazil Journal article, Clear Sale's CEO mentions that the demand for developers in Brazil was 123 thousand in 2021, and the projection is that this number will reach 797 million in 5 years. On the other hand, in Brazil today only 53 thousand professionals in this sector are graduated per year.
As a result, in the job market there is a real dispute among companies for hiring developers (the famous “devs”), data engineers and the like. The reports are diverse, from astronomical salaries, flexibility in hiring formats and working hours, and even international remote hiring.
In this scenario, M&A marketers have seen an increasing number of acquisitions where the core motivation is to hire the founders and their teams of developers and technology engineers, and these transactions are called Acqui-Hiring (acquisition to hire).
Although this represents a huge premium compared to the market salary of equivalent professionals, this has been a path taken by companies to bring in teams with specific capabilities and proven experience, rather than hiring and developing internally.
Acqui-hire's risks and mitigation mechanisms
- Continuity and organizational culture: as in every M&A process, one of the main business risks is the integration stage, whether of systems, processes, people or products. In the specific case of Acqui Hiring, this item becomes especially relevant because a poorly done integration may invalidate the entire investment made, since if the acquired team does not continue to work in the new company, the entire investment will have been in vain, since there are in essence no other tangible and intangible assets being acquired in the transaction, such as a brand, customer portfolio or fixed assets.
- Additional compensation: when conducting the study of the acquisition cost per employee and the feasibility of the transaction, it is important for the acquirer to keep in mind that, in addition to the amount paid upfront to complete the transaction, it will also be necessary to keep the new team aligned and motivated and, invariably, a relevant piece of this will be the level of compensation. Thus, when calculating the total amount to be invested to keep the employees, it is important to add to the price paid, the new salaries, bonuses and eventually the Stock Options program in order to check if the pay off is consistent with the purpose of the transaction and expected return.
As for the last item, stock-based compensation is, in addition to additional compensation without an immediate cash outflow, a retention tool for the acquired staff, especially if the shares have a long vesting, period, i.e., to be effectively entitled to this portion of their payments, the newly hired employees and entrepreneurs will need to stay with the company for a certain period of time.
- Clause of non-competition: already quite common in purchase and sale contracts, for Acqui-Hirings these non-competition clauses become relevant in cases where the selling partners make up the labor force to be aggregated. From the buyer's point of view, it is important to generate as many incentives as possible for the entrepreneur to stay on as an employee longer, and to this end, including fines if he competes in the same sector and business as before is an important tool.
- Earn out / contingent consideration: earn out clauses are also quite common in purchase and sale contracts, assigning additional payment to the seller if the newly acquired business reaches a certain sales level, profitability, or even delivers a certain product.
In the case of an Acqui-Hire, the earn out clause can be constituted and tied to the ability of the former partners to maintain the acquired team of developers and engineers, i.e. to a low turn-over rate in their team.
As an example of the above, the salespeople of the company that has been acquired can have portions of the purchase tied to maintaining a retention rate of at least 80% of their team for a certain period, such as 3-4 years. This adds another component to encourage the former owners to join the new company and motivate their team.
- Payment as compensation: finally, we highlight a point of attention already raised in another recently written article regarding the accounting and tax treatment of the price paid.
- If in the purchase agreement a certain portion of the contingent payment includes a clause or wording that directly links this portion to the permanence of the seller as an employee of the acquirer, this portion should not be accounted for and classified as part of the price paid. According to item B55 of Technical Pronouncement CPC 15 (R1) - Business Combination (equivalent to IFRS 3 (R1)), the concern about the treatment of payments with compensation characteristics is evident:
“(the) (...) Contingent consideration in which payments are automatically terminated when employees leave constitutes remuneration for post-combination services. Arrangements in which contingent payments are not affected by the employee's termination may indicate that the contingent payment constitutes additional consideration for the exchange transaction to obtain control of the acquiree, rather than remuneration for services rendered."
Under the pronouncement, a contingent consideration arrangement in which payments are automatically cancelled if the employee is terminated is considered compensation for post-combination services, consequently, would be accounted for as compensation in Company B's post-combination financial statements over the next three years.
With the labor supply gap we observe today and the accelerated transformation of companies and the economy, acqui-hire movements seem to be here to stay in the Brazilian M&A market, and the mechanisms to perfect this practice are becoming more and more assertive and sophisticated.
How can Grant Thornton Brazil help?
If you have any questions, our Valuation team is available to meet the specific needs of your business in the face of this Acqui-Hire phenomenon.
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