What made tech-stars leave their startup the morning after its grand exit?

With a little common sense, a well - managed ego and healthy teamwork - mergers and acquisitions can avoid talent loss and excessive drama.

By Nili Goldfein and Sigal Widman

Blue Shield Information Security (fictional name, true story) was founded by four young entrepreneurs who developed cutting-edge technology solutions for large organizations. In only four years, they raised 15 million Dollars in capital, developed great selling products and had 50 employees on their payroll in Israel and the U.S.

Like in most startups, the founding partners had their share of conflict and growing pains, until one day, a large market-based corporate presented them with an acquisition offer they couldn’t refuse, wrapped up in a bid of $200 Million. Cinderella story? Not Quite.

Besides the CFO, the partners kept the news to themselves, while the buyer, who was experiencing their very first acquisition — did the same. They adopted a secretive mode and began to hold daily meetings behind closed doors, while abruptly cancelling other work meetings with their employees, who in turn, became suspicious. Soon enough, rumors began spreading the corridors and people began to feel uneasy and uncertain.

A few months later, the founders gathered all employees together, shared the exciting news, popped a bottle of champagne and released a statement to the press. They also promised a high compensation package for those who chose to keep their jobs, as part of the company’s retention policy.

But by the first round of compensation payment, most tech-talents left the company. As it turns out, once the secretive transition from startup to corporate was revealed, no sum of money could compensate for their feeling of betrayal.

The Cheating Husband Syndrome

People love working in start-ups. It makes them feel fulfilled, young and alive, while the ‘no-rank’ corporate culture creates a collective vibe of partnership and commitment, that encourages employees to work night and day for a shared goal. So, when people at Blue-Shield realized that they were kept in the dark during this dramatic transition from startup to corporate, they felt like the wife who put her husband through law-school and helped him build his career, only to discover he was cheating on her for years. That’s why selling your startup behind your people’s backs is — to say the least — uncool.

Unfortunately, the buyers paid a high price for the start-up’s loss of great minds, knowledge and money, and it took a long time to repair the collateral damage. Nevertheless, lessons were learned, and by their next acquisition, they handled themselves in a totally different manner. This time the entire process was open and transparent, and all senior and mid-manages worked together towards a successful transition, which resulted in a healthy merger with minimal talent loss.

Free Falling and Failing

There are many good reasons for mergers and acquisitions in the business world, as they enable healthy organizations to expand and evolve. However, global statistics indicate that most mergers and acquisitions fail. The high-tech industry us known for its numerous examples of terrible acquisitions and massive corporate takeovers that have resulted in destruction of promising start-ups.

Still, despite the grave statistics, mergers and acquisitions are blooming. In Israel, for example, 2020 has resulted in 148 mergers and acquisitions totaling in $6.9 Billion Dollars. As crises reduce the cash flow of venture capital funds, Covid-19 is expected to increase the rate of mergers and acquisitions in the world. Considering these developments, we should pay closer attention to the reasons why mergers and acquisitions fail and address these processes with three simple principles: common sense, a well-managed ego and teamwork.

4 tips for successful mergers and acquisitions:

1. Broaden your business prospective: While most mergers and acquisitions are largely driven by technology and finances, other organizational issues such as human capital, structures, culture, information systems and work habits should not be overlooked when sealing the deal. Taking these aspects into consideration in early stages of feasibility testing can make all the difference between a successful or a failing transaction.
2. Handle your talent fairly: Don’t base your decision making of who stays and who goes on power struggles and politics, but rather on professionalism and future needs. Formulate a structured method for objective and professional diagnosis and communicate this openly on both sides of the merger.
3. Create a Change-Management Team: Transition periods in organizations are never smooth, and involve a variety of real, imaginary, and psychological challenges, such as compromising customer satisfaction, tech glitches and emotional stress. A temporary change management team designed to lead all transitional aspects during the merger’s first year, can address challenges smartly and sensitively, and may even in shorten the transition period.
4. Communicate openly: Adopt a transparent communication approach toward your employees, your customers, your shareholders, the press and the industry market. Make sure your internal communications are smart and sensitive, constructive and not destructive, and be open about anything that may affect your people, such as change in settings, cutbacks, layoffs, even screw-ups. This will avoid rumors from spreading and benefit your organizations with trust and a vote of confidence, which are both essential for a healthy transition.

Nili Goldfein - EVP Marketing & Business Development at NGG Global Consulting Solutions, specializing in Leadership and Management in a World of Disruption.

Sigal Widman - strategic people advisor and duediligence expert