Zunda Winston Xu

Job Market Paper

Acquiring to Hire: Team Complementarity and Innovation

Why do firms acquire startups primarily to obtain their teams when they could hire the workers directly? Acqui-hires preserve teams, but require purchasing a firm rather than recruiting its employees. I argue that acquisition can overcome a contracting problem: hiring workers separately may fragment teams and destroy the gains from their accumulated complementarities. I identify 12,271 acqui-hires in U.S. acquisition records. Relative to matched direct-hiring events, acqui-hires preserve substantially more of the original team and are associated with nearly three times as many patents per team member within two years. COVID-19 disruptions to in-person coordination weaken the acqui-hire advantage in joint invention and shift firms toward direct hiring, consistent with team complementarity driving this organizational choice. Acqui-hires also redirect invention toward the acquirer’s technology, potentially limiting diffusion to other firms. In an estimated equilibrium model, banning acqui-hires induces substantial substitution toward partial-team hiring and reduces startup entry. The resulting losses in invention outweigh the gains from preserving independent innovation direction, so both aggregate innovation production and diffusion fall. Restricting acquisitions may thus preserve independent ownership without preserving the teams responsible for innovation.

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