How Google killed Nest and why acquisitions fail

Google buying Nest is a good example of why most companies should avoid acquisitions. Columnist Rob Enderle writes that you can’t buy people, and a firm without the employees who made it a success is a failure in the making.

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It shouldn’t be a surprise that Nest Labs failed. It should be a surprise they didn’t just implode.

So what’s the fix?

The fix

The M&A consultants will tell you to identify your key players and lock them in with retention plans. However, this is a form-over-function solution because if they don’t want to be there having them just take up space is worse than if they left.

Before the acquisition closes assess whether the executive leadership can function as a part of your team, what form that needs to ideally take, and then do the same for each of the identified critical players. The goal isn’t to find a way to lock them in, but a way to get them to want to work with you voluntarily.

You also need to interview all of the employees who will be getting a huge payday and some that aren’t to get a sense for how many will leave because they either don’t have to work or because they are upset they didn’t get that huge payday. Granted if you can find a way to defer the huge payday or convert it into either a tax-deferred retirement fund or ownership position in the parent company that could mitigate the problem, but don’t guess at this. Do the interviews and then make an assessment as to whether there is a path to keeping the critical human assets intact before closing on the sale. Certainly you’ll want some clause in the contract that will allow you to back out of the deal if a critical number of crucial assets won’t stay with the firm.

If you don’t know what makes a company successful, you can’t assure its success. A firm isn’t successful because of its plant or products, it is successful because of its people, yet more work is often done assessing the competitiveness and interoperability of the products than the loyalty of the people.

You absolutely don’t want to start layering on a bunch of changes to span of control, policy and process until you assess what the risks associated with these changes are. Generally, that may take one or two years after the acquisition is settled and the folks you put on this project have to be willing to be flexible because doing something wrong in two years is really not a great deal better than doing something wrong on day one, all you did was delay the bad outcome.

The real problem

I think the real problem is that when most companies do an acquisition they treat it almost like you and I would buy a car. They focus on the price and closing the deal after becoming interested in the firm’s products and/or services. But you don’t buy people, and a firm without the employees who made it a success is a failure in the making and worth a fraction of its assessed value. Part of the real cost of the acquisition is critical employee retention, and retention packages do a poor job of making people want to stay.

Nest now joins a long list of companies bought by a variety of large firms where this wasn’t done and it was a waste of money. Wasting money isn’t a valued executive trait and if you aren’t willing to do what it takes to assure an acquisition is an asset, maybe you shouldn’t do acquisitions until that is fixed. Just saying.