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M&A - Negotiations

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M&A School
ZEO University/AVentures Capital

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M&A - Negotiations

  1. 1. Negotiations 18 FEB 2017
  2. 2. The Roosevelt Campaign 1. 1912 – U.S. Presidential election 2. 3 million copies of a photograph have been printed for circulation with Roosevelt’s campaign speech. 3. Campaign manager (for Teddy Roosevelt) discovers that permission to use the photograph had not been granted. No time to reshoot/reprint. 4. Copyright law: owner can demand $1 per copy to use photos. 5. How would you (as campaign manager) handle this?
  3. 3. The Roosevelt Campaign Campaign manager sends telegram to copyright owner: “We are planning to distribute millions of pamphlets with Roosevelt’s picture on the cover. It will be great publicity for the studio whose photograph we use. How much will you pay us to use yours? Respond immediately.” Photographer’s reply: “We’ve never done this before, but under the circumstances we’d be pleased to offer you $250.”
  4. 4. Claiming value in your negotiation: • Find the Value Opportunity • Beware Emotional Hot Spots • Shape Perceptions
  5. 5. Negotiation Landscape: $42.75M $48M Seller Perceived Range $60M Buyer Perceived Range $40M ZOPA = Value Proposition
  6. 6. Negotiation Frame • The negotiation frame establishes the reference point for various elements of the broader negotiation • Sophisticated negotiators often focus on establishing a favorable frame before exploring any issue or position of the negotiation
  7. 7. The hardest question . . . 1. What is the hardest question you might be asked? 2. What are your possible responses? 3. What will YOU say . . . and how?
  8. 8. Seller: “Will you develop this land for commercial use?”
 Possible Buyer Answers: Ethical? Effective? • “Yes. And we are willing to pay up to $60 million to do so.” • “We would like to do so, but aren’t 100% sure that we can get it zoned commercial.” • “Anything is possible, of course, but our strategy and experience are wholly residential and the zoning precludes commercial development.” • “Why are you even asking? You know as well as we do that it is firmly zoned residential.” • “Absolutely not, I swear on [a stack of Bibles] [my mother’s grave] [?]!” • [Counsel advises that] since our future plans are necessarily uncertain, it is inappropriate to speculate. The only relevant issue is whether my offer is acceptable to you.” • “The truth? You can’t handle the truth!”
  9. 9. Do you make the first offer?
  10. 10. Buyer First Offer vs. Final Deal PriceFinalDealPrice $35 $44 $53 $61 $70 First Offer (when made by Buyer) $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70
  11. 11. Seller First Offer vs. Final Deal PriceFinalDealPrice $40 $45 $50 $55 $60 $65 First Offer (when made by Seller) $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90
  12. 12. Power of Anchoring 1.What % of countries in the United Nations are African? Cash prize! 2.Before answering…spin a random wheel numbered from 1-100 3.Is number greater or less than the number chosen by the random wheel? 65 10 % of countries in the UN that are African? % of countries in the UN that are African? 45%24%
  13. 13. So you always make the first offer?! $42.75M $48M Seller Perceived Range $60M Buyer Perceived Range $40M ZOPA ZOPA: At any point in this zone both parties should prefer to accept an agreement rather than pursue their BATNA. Seller’s Anchor
  14. 14. Seller First Offer vs. Final Deal PriceFinalDealPrice $40 $45 $50 $55 $60 $65 First Offer (when made by Seller) $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 So if you do go first, be as aggressive as you can?
  15. 15. Our Brains on Unfairness Brain Scan after “unfair” offer ($1-$4) Brain Scan after “fair” offer ($8-$10) Sanfey, Rilling et al, Science (March 2003) conflict disgust disgust planning
  16. 16. How to manage their Insula? 
 Using the Copy Machine 1. Long lines at the copy machine 2. How do you get someone to let you cut in front? “ Excuse me, I have 5 pages. May I use the Xerox machine?” 60% say YES “ Excuse me, I have 5 pages. May I use the Xerox machine because I have to make copies?” 93% say YES JUSTIFICATION
  17. 17. The Midpoint Rule Average of First Offer/Counter-Offer FinalDealPrice 40 48 55 63 70 30 40 50 60 70 R² = 0.5442
  18. 18. Ahhh… so just split the difference and we’re done?
  19. 19. How to promote compromise? RECIPROCITY 20.7% 23.3% 40.7% 1. A national trade association for construction subcontractors 2. Needs to survey all members – so it mails out questionnaires 3. How do you increase the response rate? Response Rate I: Questionnaire II: Questionnaire + $50 payment if questionnaire returned III: Questionnaire, with $1 bill enclosed
  20. 20. What else can we do? A $20 question… 1. Which of these would make you happier? ▪ Scenario A: You are walking down the street and find a $20 bill. ▪ Scenario B: You are walking down the street and find a $10 bill. The next day, as you are walking on a different street, you find another $10 bill. 2. Which of these would make you less unhappy? ▪ Scenario A: You open your wallet and discover you have lost a $20 bill. ▪ Scenario B: You open your wallet and discover you have lost a $10 bill. The following day, you lose another $10 bill. Many small concessions Fewer large demands
  21. 21. Claiming value in your negotiation: ▪ Find the value opportunity ▪ Assess the ZOPA ▪ What are your alternatives? ▪ How would you value your Best Alternative? (Point of indifference) ▪ What’s your best guess at your counterpart’s best alternative ▪ Is there a negotiation range (ZOPA)? ▪ Set a target (flexible based on learning) ▪ Learn ▪ Identify learning objectives (assumptions to be tested) ▪ Ask questions (specific and open-ended) ▪ Probe (and watch!) for consistency ▪ Test with contingencies
  22. 22. Claiming value in your negotiation: ▪ Find the Value Opportunity ▪ Avoid Emotional Traps (when counterpart’s motivation to hurt you exceeds their motivation to help themselves) ▪ People are not simply “economically rational” ▪ Often at play when standards of fairness are compromised ▪ Aggressive, unsupportable proposals ▪ Questionable tactics ▪ Lying ▪ Threats (Power plays often lead to escalation)
  23. 23. Claiming value in your negotiation: ▪ Prepare & Learn ▪ Avoid Emotional Traps ▪ Shape Perceptions ▪ First Offers ▪ Anchor (if you are not “information challenged”) ▪ Aggressive, but ▪ Justifiable (to avoid emotional traps) ▪ Counter Offers ▪ Midpoint rule ▪ Concession Pattern ▪ Remember reciprocity… give a little to get more ▪ Aggregate demands ▪ Separate concessions ▪ Diminishing concessions ▪ Establish the Frame
  24. 24. Claiming value in your negotiation: ▪ Prepare & Learn ▪ Avoid Emotional Traps ▪ Shape Perceptions ▪ What about the Relationship?
  25. 25. Final Deal Price vs Buyer Happiness BuyerHappiness Final Price 0 1 3 4 5 40 45 50 55 60 R² = 0.0082
  26. 26. Final Deal Price vs Seller Happiness SellerHappiness Final Price 0 1 3 4 5 40 45 50 55 60 R² = 0.0247
  27. 27. Claiming value in your negotiation: ▪ Prepare & Learn ▪ Avoid Emotional Traps ▪ Shape Perceptions ▪ Understand your relationship goals ▪ You may see them again… how likely? ▪ Outcome and relationship are often uncorrelated ▪ You can give big discounts and still have a bad relationship! ▪ Process often trumps outcome in building relationships

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