Silicon Valley’s acqui-hire ruse may have passed its prime

Imagine not being invited to the office party — one where attendees are gifted with swag bags containing millions of dollars. That’s the position two employees of chipmaker Groq found themselves in when mega-sized rival Nvidia hired most of their colleagues. Selective guest lists may work for elite soirées, but they’re not so well suited to corporate M&A.

Nvidia paid $20bn to get what it wanted from Groq. But rather than doing so through a traditional acquisition or asset purchase, it set aside a $3bn bonus pool with which to lure Groq’s top talent, and paid $17bn to the company to license Groq’s intellectual property. The disgruntled engineers, as shareholders, got their cut of that $17bn, but that was less than they would have got if Nvidia had bought the company for $20bn. They have therefore sued Groq’s board.

Their chagrin, as shareholders at least, is understandable. So-called “acqui-hires” are one way of buying the guts of a business without triggering antitrust processes that apply to conventional mergers. In practice, they can leave shareholders feeling as though they have lost prized human “assets” without being compensated adequately.

It doesn’t help that the Groq board seems to have given Nvidia what appears to be a bargain. When the Groq shell was finally liquidated, the chipmaking giant offered a “squeeze-out” payment for cash and sundry assets of just a few hundred million dollars, only to then revalue its purchases at $3.5bn.

Imagine Nvidia had gone the more direct route, and bought Groq outright. The engineers might have received a more generous offer for their shares. But such a deal would have taken a long time to close, and might well have been blocked outright by competition watchdogs. Of course, in that scenario they might have at least kept their jobs.

The big question is whether acqui-hires will come to be treated as mergers from a competition standpoint. The Biden administration reviewed thousands of similar arrangements, taking the view that substance mattered more than form. The Trump administration has expressed concerns too, though no formal challenge has yet arrived.

The objections of irked former employees add a new challenge for such deals. If they win, future acqui-hires will probably become more expensive, and thus less attractive. Either way, lawsuits give regulators another reason to wise up to the acqui-hire strategy. Kudos to tech titans for finding innovative ways to hack the system, but in future they may be forced to take a more direct approach.

sujeet.indap@ft.com