Why Employees of Acquired Firms Leave in Droves (And Can We Predict Turnover In Advance?)

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The Wharton School's J. Daniel Kim has written a good paper titled, "Predictable Exodus: Startup Acquisitions and Employee Departures." Kim finds that 33% percent of workers brought into a company through an acquisition of a startup leave within 12 months, compared to 12 percent of other employees with similar backgrounds. Why do they leave? Could we actually predict whether such high turnover will occur BEFORE we make a deal and acquire a startup? Kim has developed a rather ingenious strategy for examining that question. He explains how he constructed a measure he calls "startup affinity." 

I track employee departures prior to the acquisition along with their destinations. While these individuals leave before the acquisition, their decisions to join a young firm or an established company provide useful information for predicting their peers’ post-acquisition retention outcomes. When aggregated up, these mobility choices reflect the firm’s tendency to attract workers who prefer to transition to startups rather than established firms. Following this reasoning, I define firms to have a strong affinity for startups if their former employees – who leave prior to the acquisition – systematically tend to move to other young companies.

Kim then goes on to examine the relationship between startup affinity and worker turnover after an acquisition:

I find that the pre-acquisition departure patterns strongly predict the acquired employees’ decision to stay with the buyer. In short, target companies with a strong affinity for startups exhibit much higher rates of turnover following an acquisition. Furthermore, these effects are magnified when the acquiring firm has a lower startup affinity than the target firm, lending empirical support to the role of organizational mismatch. Therefore, ex-ante differences in the target and buyer’s organizational type largely explain why many acquisition deals fail to retain the new workers while others succeed in capturing talent. 

What does this mean for larger firms employing an acquisition strategy to target technology and talented employees at startups in their industry or a related market?   Companies have to do some strong self-diagnosis before embarking on an acquisition spree.  They have to understand their current workforce and culture, and in so doing they can assess whether they are a good match for the target firm's employee population.   Remember, those workers don't get to choose to be employed by the acquiring firm.  They have chosen to work at that startup.  They can then vote with their feet after the deal.  If there's a strong mismatch between the employee population and the acquiring firm, you can expect a significant dose of turnover.  Perhaps that's not concerning to some executives, but in many cases, a big chunk of the value of the deal is tied to the intellectual capital embodied in the workforce.  If those folks leave, what is left?  Often, the remaining physical assets (technology, etc.) aren't worth nearly enough to justify the takeover price if the workers leave in droves.