Negotiating in the context of mergers and acquisitions and corporate restructuring

I had the privilege of interviewing an experienced C-suite executive about negotiating in the context of mergers and acquisitions. Here are some of the interview’s highlights. My interviewee believes that negotiation is a combination of art and science, but more art than science. Therefore, he views it as something that you need to have inside of you. It is a combination of personality, thinking, ability to execute, and ability to react very quickly. His negotiating style can vary depending on the situation. He tends to be a friendly negotiator, believing that you can get more things ‘’with honey than with vinegar’’. But, he can also be tough depending on which side of the deal he is. As a buyer, he will tend to show more flexibility at the beginning and more rigidity once he brought somebody into the deal. However, he will usually try to keep it friendly as long as possible. The key is to know what your ultimate objective is.

Some people have characterized him as a tough negotiator, but he thinks that this is a perception. He pushes arguments by establishing his credibility first and focusing on both parties interests (In the spirit of WISE threats (Galinsky & Liljenquist, Putting On the Pressure: How to Make Threats In Negotiations, 2004)). He believes that his negotiating skills have improved throughout his career, and that the improvement which is related to experience has more to do with comfort level of knowing what the outcomes can be, because when you are younger, you are a little less sure what the outcomes of a certain position can be (Possibly implying that you develop a better feel for BATNA, reservation value, bargaining zone). As you get older, you are driven a little bit more by your confidence in your ability to win as opposed to your fear of your ability to lose. He believes that the ‘art’ component is the one that gets more developed with experience. For example, he states that it is very important to know who you are negotiating with, and that the ability to judge character is something that improves with experience. He will thus try to have an informal meeting first to know who he is dealing with and understand the person a little better rather than meeting for the first time for the negotiation (Perspective taking to better understand his counterpart (Galinsky, Maddux, & Ku, 2006)). He doesn’t always have the luxury to do this but in the M&A world he often does. He also believes that the best negotiation should be win-win, but contends that this is a little theoretical and that there are situations where it is simply not possible.

Concerning M&A negotiations, he says that in the end it will come down somewhat to price. But that should not be a starting point, because if you start with price, all you are going to do is negotiate yourself down. Often in the M&A world people are very keen on getting the price on the table very early so that they know where you stand. He tries to avoid that and rather initially explain to the opposition why doing a deal with him would be the best thing that could happen, what advantages he would bring to the table in terms of the business. He usually works with a 3 steps framework: in the first step he sells himself (Principles of Liking and Authority (Cialdini, October 2001)), then he gets the target to sell its company to him (Principle of Reciprocity (Cialdini, October 2001)), and in the final step he negotiates the price. Usually in M&A transactions you are never the only person at the table, so it complicates things. Therefore, you also need to monitor your competition.

There are many ways in which to structure a deal. Price is a number. But it can be negotiated as a payment upfront, a deferred payment, a payment that is contingent on certain things, etc. (Focus on deal design to create value as in (Lax & Sebenius, 2007)). Therefore, you have to find out what the target thinks and what it wants (Focus on the other party’s interests in the spirit of (Malhotra & Bazerman, September 2007)). In the end, price is related to the risk involved. For a company with lower risk you will tend to pay a higher price and vice versa. Price is important, but more importantly what will make the acquired entrepreneur comfortable (Importance of non-price issues such as relationship, social contract, and the interests of the full set of players. The most important thing according to (Sebenius, April 2001) is to always try to put you in the other person’s shoes. It’s vital to try to understand in depth what the other side really wants out of the deal.). As a seller, he tries to focus on maximizing value, constantly looking for ways and places where the buyer can get additional value. The right price is a balance between value and risk.

He’s seen many times people that are ‘hot for the deal’. That’s a risk that you have to guard against. There is always pressure to do a deal. The deal was initiated for particular strategic reasons, but sometimes you become blind to signs on the side of the road. There is always a danger to become emotional with a deal (He recognizes and aims to guard against the escalation of commitment). The second danger is to not evaluate the risks properly. People forget that 90% of the work in M&A occurs after you’ve done the transaction, not before.

Most fusions fail because people don’t take enough into account the human side of the transaction. They focus on the synergies but they focus from the spreadsheet point of view. When you are negotiating you need to know what your limitations are. The main objective is to find how to make it win-win for everybody along the table (Distributive approach). Some people have the attitude that if everybody walks away from the table feeling unhappy, then you know that you’ve made a good deal. That’s one way of evaluating. He believes more in the win-win. A fair price is when everybody is happy when they walk away.

A common mistake is to get too emotional with a deal. He likes to make sure that he is not the only person who can authorize something to happen. He creates a two level system so that there is the ability to step back and say: this is what we have on the table, I need to call back and talk to my people, or get authorization, so that it gives him that break to get out of a situation that he may not be fully comfortable with (call it off, cool off, confirm instructions / priorities). He always likes to lay out some kind of a road map (what you need to accomplish to get a good deal). Without having a framework of understanding what you want in a transaction, it’s very difficult to go in and negotiate. If you go in a one way road, there is only one way in and one way out (Importance of being prepared, research the other party’s BATNA, and preparing multiple scenarios).

In multiparty negotiation, the first challenge is to establish what each party’s interest is. Each party has its own objectives. It adds a significant complexity to the negotiation, especially if all the parties have agreed on the objectives but disagree on the path to get there. When this happens his strategy is to use divide and conquer, by focusing on the one or two people that you think will be able to get the deal done for you, and letting them convince the other people (Principle of Social Proof (Cialdini, October 2001)).

Are people disciplined with their walk-away number? It depends whether they are using their own money or somebody else’s money (!). Typically the deals that get out of hand involve other people’s money (The agent concept). In Canada people tend to be a little more conservative because the banks are more conservative. As to how to split the pie between the acquirer and the target, the person who makes the synergy tends to keep it. The reality is that everybody overestimates the synergies, so nobody wants to assure it, but they use it to sell the deal internally or to the banks.

You never want to disclose what your strategy post acquisition is, because until the deal is official, you don’t want anybody else to know what your strategy is. There are two main reasons that explain why deals fail to achieve results: misevaluation, and forgetting the amount of efforts that needs to be put in to achieve results and synergies.

Where to begin in a negotiation depends on who is on the other side of the table. Sometimes you will put a higher offer because you want them to open the door, even though you know it might not be worth that much. Another approach is to put an offer on the table that meets the expectations, e.g. they’ll give you an idea of what they are looking for, and you put in an offer that comes close to that. Putting an offer on the table does not mean that you’ve made a deal. Because there are often multiple bids, you need to make sure that you get a ticket to get invited to the party (Final round of negotiations). You also need to be prepared to pay the price that you’ve offered, if not you should not put an offer on the table. There are a lot of people who put in offers anyway and then slowly back off… He will go a little above or below the value expected by the opposing party. If you go a lot below you are wasting your time (You need to be in the bargaining zone). Usually, you will overprice to get invited, knowing fully well that you’ll have opportunities to bring the price down once you’re in (High versus low starting price in an auction context (Galinsky, Ku, & Mussweiler, 2009)).

Moving away from a competitive negotiation has to do with how you present yourself going into the transaction. You have to build trust from the beginning. He tries to sell himself first. Building trust is a matter of how transparent and how successful you’ve been in the past. Integrity and reputation are important (Principle of Authority (Cialdini, October 2001)). Usually there is a point where the situation flips over (from competition to trust), but sometimes it never happens. It depends on who you are dealing with.

As for simplifying a negotiation, he tries to prioritize issues because he never wants to negotiate everything in one shot. He separates issues into core and ‘chip-away’ issues. After he’s got the main issues, he goes after the chip-away ones, knowing that if he cannot get them it’s not going to kill the deal. He likes to put all the issues on the table first to know what they are, even though they are negotiated one at a time. He doesn’t always have that luxury though.

He always does a post mortem on a deal; otherwise he says that you don’t learn anything. It’s not always easy to do a post mortem because not everybody will necessarily be honest. You have to do it not just immediately after the negotiation but also down the road. If unsuccessful, you’ll try to figure out the things you did to screw it up, if it was not related to price, because if it is related to price you can analyze it as much as you want but it doesn’t matter because you did not have the right price… If you lost for other reasons it is important to find out why. That could be a question of how you negotiated as a team, how you negotiated as an individual, the trust that you were not able to build up, a lack of understanding your competition, a lack of internal support, etc. There could be many reasons and it’s good to try to understand them. It is common practice to do it.

I learned a lot from this interview. My interviewee is a very experienced negotiator and even though he does not have formal education in the field of negotiation theory, his vast experience and self-learning provided invaluable insights in, as he would say, the art and science of negotiation. I believe that his strategy, approaches, and in general what transpired from the interview is very much in line with negotiation theory. I (re)learned the importance of friendly negotiation and of understanding the desires and objectives of the other party. I liked his 3 steps method where he first sells himself, let the other person sell the business, and finally negotiate the price. For me, it really seemed like an experienced negotiator is all about nuance and finesse…


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