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Why acquirers retain tech startup CEOs

8 December 2021

The article at a glance

Acquirers are more likely to retain a young tech firm’s CEO if they are a founder owing to their ‘pivotal’ role in deal implementation, finds study co-authored at Cambridge Judge Business School.

Acquirers are more likely to retain a young tech firm’s CEO if they are a founder owing to their ‘pivotal’ role in deal implementation, finds a study co-authored at Cambridge Judge Business School.

Keivan Aghasi.
Dr Keivan Aghasi

According to much conventional wisdom, founder-CEOs should be replaced by professional managers when a firm matures to a certain milestone – be it the first round of venture capital financing, delivery of the first product to customers, an initial public offering, or, especially, acquisition by a larger company.

Such thinking is that founder-CEOs may have come up with a terrific concept and had the drive to transform that idea into a stable venture, but they lack some basic managerial abilities necessary to grow and sustain the business.

A new study co-authored at Cambridge Judge Business School challenges some of those assumptions, particularly regarding the acquisition of young technology companies.

The research based on 448 tech-firm acquisitions finds that in technology-driven purchases of young firms, acquirers are more likely to retain the target firm’s CEO if he or she is one of the company’s founders. The study was recently published in the Journal of Management Studies.

“If a young firm possesses technological assets that make it a potentially attractive acquisition target, having a founder-CEO likely makes the firm even more attractive because of the pivotal role this individual can play during acquisition implementation,” says the study.

While previous studies found that founder-CEOs (who often have very large stakes in their firms) have greater incentives to negotiate a better deal with acquirers, the new study suggests another reason for a sweeter price: acquirers pay a higher premium for such young tech firms owing to the acquirer’s expectation that there will be benefits from keeping the founder-CEO during the acquisition’s implementation page.

“The study sheds light on a topic that has long been debated by companies and investors, and holds practical implications for future tech takeovers,” says co-author Keivan Aghasi, Research Associate at the Entrepreneurship Centre of Cambridge Judge Business School.

“We find that founder-CEOs of young tech target firms have unique firm-specific human capital, which can translate into greater acquisition implementation abilities than target professional CEOs. Also, because target founder-CEOs usually have a greater financial interest in their companies, there are stronger monetary incentives for them to deploy their managerial skills to make the acquisition implementation a success.”

Keivan adds: “While most previous studies of CEO retention have focused on US public firms, our study looks at target CEOs of both privately held and public firms in the US and Europe, so this provides a broader picture of the dynamics of tech-firm takeovers.”

The study is based on a sample of 448 acquisitions of small tech firms (companies with 500 or fewer employees) by larger firms (companies with more than 1,000 employees). The paper notes that acquisitions fitting this framework “are an important component of the open innovation strategies of large incumbent firms” – including such recent examples as Merck’s acquisition of biotech startup Peloton for $2.2bn, PayPal’s acquisition of Swedish fintech iZettle for $2.2bn, and Salesforce’s purchase of MuleSoft for $6.5bn.

Industries selected for the sample include pharmaceuticals, measurement instruments, software, semiconductors, and computer and office equipments. The average age of the target firm was 13 years; target founder-CEOs accounted for 44% of target CEOs; and 63% of the sample’s target CEOs stayed with the post-acquisition company up to the second year after the purchase.

“Our results are in accordance with the view that the retention of founder-CEOs is especially appropriate for technology-driven acquisitions of young firms,” the study concludes. “When the targe firms are mature, or the acquiring managers pursue other objectives, the fact that the target CEO is one of the firm’s founders does not influence post-acquisition retention.

“These results advise acquiring managers, particularly those who have less acquisition experience, to be prudently selective regarding when and why retaining (or replacing) target founder-CEOs.” The study in the Journal of Management Studies – entitled “Post-acquisition retention of target founder-CEOs: looking beneath the surface” – is co-authored by Keivan Aghasi of Cambridge Judge Business School, Massimo G. Colombo of Polytechnic University of Milan, and Cristina Rossi-Lamastra of Polytecnic University of Milan.