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Mand a toolkit negotiating


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Mand a toolkit negotiating

  1. 1. M&A TOOLKIT Closing: Negotiating© 2007-2013 IESIES Development Ltd. All Ltd. Reserved © 2007-2013 Development Rights All Rights Reserved
  2. 2. If we are not the “Natural Owner” of a business, approaching it risks a bidding war with a temptation for us to overpay Bid above $90 and you destroy value for your BUSINESS VALUE 90 shareholders ($m) 30 Buyer overpaying 60 Risk of competing bid Bid below $60 and there is no reason for target to sellValue to old owner Value to us Value to another company © 2007-2013 IES Development Ltd. All Rights Reserved
  3. 3. CLASS EXERCISE: Determining key price pointsBUSINESS VALUE 90($m) You are the buyer 1)What is your “walk-away” price? 2)What is your target price? 3)What is your opening offer? 60Value to old owner Value to us © 2007-2013 IES Development Ltd. All Rights Reserved
  4. 4. Negotiating Theory requires you to calculate your key price points before starting the negotiationNEGOTIATING THEORY• Set a “Walk-away” price that leaves enough value creation for you to make the deal worthwhile (remember opportunity cost)• Set a realistic “Target” price that will make you happy• Set your “Opening Offer” at the lowest possible price that will start the negotiation, and not cause the seller to walk away, get insulted, think you are not serious o Don’t leave $ on the table o Use the “anchoring” value of the first offer © 2007-2013 IES Development Ltd. All Rights Reserved
  5. 5. The opening offer should start the negotiation without leaving anything on the table BUSINESS VALUE 90 ($m) 80 Buyer “Walk away” [Buyer BATNA*] ZOPA [Zone of 72 Target price Possible Agreement] Seller “Walk away” 65 [Seller BATNA*] 60 60 Opening Offer Value to old owner Value to us*BATNA – Best Alternative To a Negotiated Agreement All Rights Reserved © 2007-2013 IES Development Ltd.
  6. 6. There can be reasons a seller will not want the maximum priceREASONS A SELLER WOULD SELL TO YOU BELOW MAXIMUM PRICE • Distressed seller – no time to generate alternative bids• Naïve seller• Strategic seller – e.g. avoiding competitor• They want something other than the highest price (e.g prestige) © 2007-2013 IES Development Ltd. All Rights Reserved
  7. 7. Identify your deal-breakers up-frontPOSSIBLE DEAL BREAKERS•Price?•Equity %?•Deal structure – e.g. cash vs deferred compensation?•Management/Board Control?•Irrevocables?•Choice of CEO?•Post-merger plan?•Integrity/Behaviour of other party? What will cause you to walk away? © 2007-2013 IES Development Ltd. All Rights Reserved
  8. 8. You also need to identify who you are negotiating with and their likely motivationsDIFFERENT SHAREHOLDER TYPES The CEO/Chairman? Management? Government? •Local? What motivations •National? of these owners (other than price)? Institutions? Private Equity? Strategic Investors? The Public? © 2007-2013 IES Development Ltd. All Rights Reserved
  9. 9. There are “win/win” and “win/lose” aspects to every negotiationTYPES OF RESULT IN A NEGOTIATION “Win/Win” Creating joint value for both sides “Win/Lose” Transfering value from one side to the other © 2007-2013 IES Development Ltd. All Rights Reserved
  10. 10. There is an opportunity to create “win/win” value in a negotiation if the two sides put different values on different itemsEXAMPLE OF WIN/WIN VALUE IN A DEAL The seller thinks their own shares are worth $45 The buyer thinks the seller’s shares are worth $35 Q: Should we structure the deal in cash or shares? A: We can “maximise the size of the cake” (WIN/WIN) by maximising the % of the deal in cash. This deal structure transfers value efficiently. How many shares…………… still WIN/LOSE Good negotiation: Probes the other sides rationales and resistance levels to find out how to transfer value efficiently to maximise Win/Win…….……… and also comes out ahead on Win/Lose © 2007-2013 IES Development Ltd. All Rights Reserved
  11. 11. A “win/win” negotiating approach tries to create the most efficient deal possible Our Result WIN/LOSE Efficient Gain a bigger “slice of frontier the cake” through effective negotiation tactics Possible WIN/WIN results “Maximise the size of the cake” by getting to the Efficient Frontier Our“Walk away” Their Their Result “Walk away” © 2007-2013 IES Development Ltd. All Rights Reserved
  12. 12. There is equal skill in knowing how to sell a business to get the best price TIPS ON SELLING A BUSINESS •Sell into a rising P&L and market trendMake it easy for •Realise all short term opportunities; don’t invest in longthe buyer’s term opportunities •Help the acquirer create a compelling strategic/synergyvaluation team story •Robust data and complete documentationEliminate value •Close-out uncapped and uncertain liabilitiestraps •Explain why are you sellingCreate an •Establish a sense of urgency – what is the real or artificial deadline?advantaged •Create alternatives, find other bidders, set up an auctionnegotiating •Know your “walk-away” price and terms, and stick toprocess them © 2007-2013 IES Development Ltd. All Rights Reserved
  13. 13. Key Learnings from Negotiating• Do your homework before walking in (what are you negotiating on, what is each worth to you, what is your walk-away point)• Have a support team to run numbers while you negotiate• Probe to understand what they want and value• Full explore how to create win/win value through deal structuring• Use a process and tactics that match your negotiating style. Is it a one-off negotiation or repeated?• Be aware of ethical dilemmas © 2007-2013 IES Development Ltd. All Rights Reserved