There are two sides to an acquisition, especially when a large, established company acquires a technology startup. For the startup, given the increased difficulty of an IPO and the immediate gratification required by investors, an acquisition is the "standard" exit strategy. In fact, one of the most typical questions during a pitch even to angel investors is: who will potentially acquire you, and what are some comparable acquisitions?

For the large acquirer, the purpose of the acquisition is different. Large companies gave up on internal innovation. In fact, they kill internal creativity, unintentionally. Clayton Christensen claimed that "the best [established] firms... failed, it was for the same reasons--they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers' next-generation needs." Teresa Amabile added that "...creativity gets killed much more often than it gets supported. For the most part, this isn't because managers have a vendetta against creativity. On the contrary, most believe in the value of new and useful ideas. However, creativity is undermined unintentionally every day in work environments that were established-for entirely good reasons-to maximize business imperatives such as coordination, productivity, and control."

Realizing they fail to innovate, large companies seek to acquire innovation. In 2015 alone, more than $5 trillion were spent on acquisitions. However, different studies put the failure rate of acquisitions between 50% and 90%, with the majority claiming 70% to 90%. In 2009, Cisco, considered by many a leader in innovation-through-acquisition, acquired Pure Digital, the creator of the Flip Camera for $590 million. In the 2009 press release, Cisco stated that "The acquisition of Pure Digital is key to Cisco's strategy to expand our momentum in the media-enabled home and to capture the consumer market transition to visual networking." However, a short two years later, Cisco shut down the business unit and wrote off the purchase price.

A 2011 Harvard Business Review article and a 2012 article in Business Insider stated the following main reasons why acquisitions fail:

  • The acquisition was done for the wrong reasons;
  • The price was wrong and does not present a positive ROI;
  • The business model didn't work out; and--
  • The integration failed (due to business model and process mismatch).

However, with my experience in mergers and acquisitions (both as a seller and a buyer), and based on the stories told by the participant in my two-year research of employee creativity in startup and mature technology companies, the real reasons are different, and relate to the people themselves, in both companies. Those reasons are:

1. Forced integration

A large semiconductor company acquired a smaller fabless semiconductor company that was about to release a component that will complement the large company's offering. During the due-diligence process the release date of that component was presented. However, after the integration, the acquiring company insistent that the new component be released using the large company's processes, instead of the 3rd party process that was used by the startup originally. As a result, the release of the new component was pushed out 18 months, losing both companies significant competitive position. Forcing a higher level of integration than is really needed can break the assumptions made prior to the acquisition.

2. Nonexistent trust

Acquisition negotiations (especially when one or both companies are public) are very confidential and involve only the highest levels of management. In fact, the employees who will have to work together on both sides after the acquisition often are unaware of the upcoming merger. Trust cannot be built overnight. Both teams are now forced to begin collaborating, and a lot of pressure is put on them due to the typically high acquisition price and expectations from it. The lack of pre-existing trust prevents true productive cooperation. Trust is built over time, and is seeded by mutual respect. Making a "sudden" introduction between the teams post acquisition does not promote such respect. In fact, both teams (especially those in the acquiring company, who are typically kept in the dark more often than the smaller startup team) begins to lose their trust in their own management that kept them in the dark.

3. Power games by the acquiring team

The team in the acquiring company will often feel unappreciated by their own management due to the acquisition. The implied message from management is clear: they were not innovative enough, forcing management to acquire an external team. Management continues to talk about how great the acquired team is, which continues to hurt the local team's self-esteem. Their way to gain some self-esteem back is to use internal processes to whip "the new guys." The local team will use every power play in their book to prove their own value. They undermine every effort made by the newly acquired startup team to succeed. This will not help the acquired startup team respect them or trust them. On the contrary. One founder of a startup company left the acquiring company even before fully earning his acquisition payout. He received enough money, and couldn't stand the constant "harassment" by the local team that, in his opinion, was driven by anything other than good productive intentions.

4. Arrogance of startup people

At the same time, the acquired startup team has just received the ultimate validation of their "greatness." The large company had just paid a large amount of money for what they have. They enter the relationship from a position of superiority, and they  show it through arrogance. They will downplay everything the local team has done to date. "Obviously, if you knew what you were doing, your management wouldn't need to acquire us." Furthermore, key players in the startup company received so much money that they don't really need to work anymore. They can retire now, and they show it. They don't have to take the abuse anymore. It furthers their arrogance, or at least as perceived by the acquiring company's local team.

Don't assume it will not happen to you. You are not immune to the statistics. Instead, think ahead of how to make the two team work well together. Neglecting the dynamics of the two teams of strangers, their different cultures and motivation, will prove to be your biggest Achilles hill.

Published on: May 17, 2016
Like this column? Sign up to subscribe to email alerts and you'll never miss a post.