Over the past 20 years I have witnessed a wide range of negotiation tactics. At one end of the spectrum are the business people who are so desperate to get a deal done that they will agree to almost anything, and at the other end are the ones whose overriding motive is to drive the harshest deal possible. When it comes to choosing the most effective negotiation strategy to employ, there are no hard and fast rules. Much depends upon the situation and the individuals involved; however, the following points are universal.
Before you engage in any form of negotiation, you need to be very clear about what you want from the transaction. What you want will likely cover a wide variety of items, but your real task is to distill this down to a clear list of “must haves” versus “nice to haves.” For example, if you are looking at a potential joint venture, you may insist on having majority control and the right to appoint the senior management team, but you may be willing to maintain certain local brands and to guarantee senior positions for longtime staff members. If the other side is unwilling to agree to your “must haves,” then the deal is unlikely to be worth doing no matter what the price might be. Willingness to walk away from a potential deal is one of the main elements that separate companies who are successful at M&A from those who are not.
Next comes research on the company you will be dealing with and the individuals with whom you will be negotiating. This preparation is vitally important, especially on cross-border deals. It’s a great icebreaker in the initial meetings if you can compliment the other side on the successes they have achieved in building their business or mention a significant family event such as a son’s recent wedding or the birth of a grandchild. It’s relatively simple to do this research, but it pays huge dividends in helping to establish a positive relationship. I was involved in a transaction in Japan where the key to getting the deal done (after many years of failed attempts) was to understand the internal dynamics of the founding family and then to craft a structure that addressed their various needs and concerns. It was by no means easy to do this, but ultimately it was the key to success whereas merely offering a higher price would have gotten us nowhere.
When you enter negotiations, avoid becoming so confrontational that you cause the other side to lose face. Transaction negotiations always involve a conflict of interest with both sides looking to get the best possible deal for their company. However, you should strive for a win-win situation or at least an amicable outcome. This point is critically important, particularly in Asia where saving face is crucial. Local businessmen and entrepreneurs want to be treated as equals and are highly unlikely to agree to a deal that would involve a loss of face. You may surmise that they need the deal desperately and have nowhere else to go, but you’ll likely find that saving face is more important to them than making the deal.
This brings up another topic—the need to manage one’s external advisors. This is especially important in situations where an international firm is negotiating with a smaller local firm. Unfortunately it’s not uncommon to see advisory firms trying to score points against their competition, no doubt in an attempt to justify their fees. This approach sours the negotiation environment. If you see it happening you should discreetly step in, as left unchecked the local advisor is likely to attempt to dissuade his client from doing the deal. Remember that while you may be experienced and comfortable in the negotiation environment, the other party may not have this background and as a consequence may rely too heavily on their advisor’s inputs.
Price will invariably be one of the main points of negotiation, but looking at the price in isolation is a mistake. Negotiating a transaction that fails to deliver on the “must haves” is no good, no matter what price you’ve negotiated. This is why establishing the want list is a necessary first step that will guide you through the negotiation process. As said previously, this list will contain items that are viewed as being crucial to the success of the business, such as management control, non-compete clauses, right of first refusal on future share sales, and so on. When you reach agreement on these points, then the price negotiations will invariably take care of themselves…assuming that both parties are prepared to be reasonable.
During the negotiations it’s imperative that you listen to what the other side is saying. This advice may sound obvious, but many Western firms are poor listeners who focus mainly on telling the local company what they want. This not only creates a loss of face but also can lead to situations where you are making false assumptions about what the other side wants. Had you listened attentively, you would invariably have uncovered this information. It’s been my experience that at some stage during the negotiations people will come clean as to what they really want, but if you are not actively listening then you may miss it entirely. It can be difficult to understand what is being said, especially when different languages, cultures, and translators are involved. In these situations it pays dividends to be patient and constantly clarify your understanding of their requests and comments.
Another common mistake is to assume that something fundamental to the other side that they bring up early in the discussions can simply be negotiated away or compensated for via a higher price. If something appears to be vitally important to the other side, then you need to be clear about where you stand on the issue. If you can’t live with their stipulations, then it’s best to be totally upfront about this and terminate negotiations early if need be. For example, if the owner of the target company is only interested in selling a minority stake in their business because they want a son to inherit the company, simply paying a higher price will be unlikely to sway things your way. In these situations the focus should be on searching for workaround solutions such as offering the son a senior role in your company with a view to his coming back as general manager at some point in the future.
During any negotiation process you will invariably find yourself in a position where you need to offer concessions to move the transaction along. In doing so, you must make sure that (a) the other side recognizes you are making a concession, and (b) you are also attempting to negotiate something in return. Above all, try to make sure that concessions are reciprocal. Don’t put yourself in a situation where you are the only one offering up anything, because when this happens there is a good chance the other side will continue pushing until they demand something you simply can’t give.
Try to prevent competitive situations by signing an exclusivity agreement early in the negotiation process. It may not always be possible to do this (as in the case of an auction), but you should aim for exclusivity because negotiating with a gun to your head in the form of a competitor acquiring the asset can lead to overpayment or poor due diligence as the process becomes rushed. Also make sure non-disclosure agreements are in place before detailed negotiations get underway.
Having an empowered deal team is vitally important if the negotiations are to run smoothly. This should be relatively easy if you are clear about your “must haves.” There is nothing worse than sitting at a negotiation table with people who can’t agree on anything or who agree but then come back days later saying the real decision maker is not in agreement, which brings you back to square one. I’m not suggesting that very senior management can’t play a valuable role in negotiations, but it can be helpful to keep them in reserve for the final push because this allows you to say, “If we can agree on everything else, then I’ll go back to HQ and see if I can get them aligned on this.” The deal team needs to have credibility in order to be effective.
The composition of the deal team depends on the organization and the situation involved; however, the key players on the team should have some prior M&A experience. This is especially important in regard to legal and accounting professionals because these functions frequently are outsourced. There’s nothing worse than having a deal fall through because an inexperienced lawyer can’t identify a solution to some regulatory issue or find a way to protect you from some potential risk. Equally, although accounting considerations are important, they can’t be allowed to drive the process.
Engaging in negotiations can be a protracted process, and for long periods of time it may appear that you are taking one step forward and two steps back. This is especially true of deals in Asia. Remember that the company you are negotiating with will most likely have a different time horizon that does not necessarily align with your corporate schedule, and forcing the pace may not yield the best results. Be patient, and avoid throwing around the warning “This is a deal killer.” True deal killers are generally few and far between. Ask yourself, “If they call me on it, am I really prepared to walk away?” If not, then you run the risk of damaging your credibility when you issue ultimatums that have no weight behind them.
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