There is a substantial burden on the deal teams to create value, the poor negotiations can break the deal and squander the value. In this article we look at value creation strategies in negotiating the business deals.
#BusinessDevelopment, #Oil, #Gas, #MergersandAquistions, #Negotiations, #Valuation, #PrivateEquity, #InvestmentBanking
It was fall of 2016, the end of a day. I was getting ready for the upcoming Thanksgiving break, when the phone rang. It was a board member on the line, he asked me; “Did you see the new data in the Virtual Data Room (VDR)? – half the gas volumes have vanished, do we still have the deal? ” I was afraid of this disturbing outcome, that’s why I had suggested making a non-binding bid earlier, till we had a better view of the subsurface, when full data was to be released. As I hung up the phone, I braced myself for the long and arduous negotiations that we're up ahead. Needless to mention, the turkey was spared that thanksgiving, and I spent most of my holiday in the office.
Deal negotiation can be fun, yet very arduous, and at time very frustrating, If requisite preparations are not done ahead of time. In my earlier blogs; I focused on new business development and achieving growth in upstream oil and gas business organically, through exploration and inorganically through M&A. Here, I focus on the negotiation strategies that helped me in creating and claiming the value during deal negotiations. It is recognized that there are more facets to the deal negotiations, then simply value claiming and value creation (ref1 and ref-2).
TOOLS & TAXONOMY
First, it’s important to know the taxonomy of the terms and the tool box and the steps
Due Diligence; detailed review of the data and information of buyer/seller
Estimate your BATNA (Best Alternative to Negotiated Agreement)
Estimate your Reservation Value (RV) - The minimum value you will accept
Estimate counter parties BATNA
Estimate counter parties RV - The maximum value they will likely to pay
Estimate Zone of Possible Agreement (ZOPA) – the difference of the two RV’s. This is the value at the the table
VALUE CLAIMING
Claiming value is negotiating a 'single issue' or interest (for example asset price). It is a zero-sum game, a value gained by one part is the value lost by the other party. It’s a divisive issue, that sees the deal as a fixed pie; a win-lose situation. If you have a value claiming situation use following strategies:
Ensure you have all the data/information and your BATNA is strong
Make 'aggressive first-offer' (> Counter parties RV) and establish an ‘anchor’ (an offer that gets counter parties attention). Power of anchor is substantial – It maximizes ZOPA
Always provide justifications of your aggressive offer (supporting material)
Don't make first offer, if you lack data/information on the counter party and/or your BATNA is weak. Let counter party make the first-offer.
In response to first offer, Ignore, counter parties anchor and/or don’t dwell on it.
Separate ‘influence’ from ‘information’ in responding to the counter party
Make your own aggressive counter offer, but propose to negotiate
Give time to the counter party to moderate their offer, without losing face
Always consider the context of the relationship
Preparing and Executing Strategies
Dive deep during the 'due diligence,' collect all the data before negotiation
Identify your assumptions and challenge them before negotiation
Ask questions that challenge your assumptions during the negotiation
Ask ‘Indirect,’ 'open-ended' question; unravel counter parties BATNA/RV in negotiation.
Talk less and listen more; get maximum information during negotiations
Although, there may always be some elements of value claiming in negotiations; it is better to identify and introducing value accreting issues early in negotiations.
VALUE CREATION
‘Value claiming’ is a negotiation of a single interest in the deal; a ‘fixed-pie’ mindset or 'win-lose' situation. ‘value creation,’ on the other hand involves bringing multiple interests to the negotiation table; that creates higher total value or 'enlarge-pie’, a 'win-win' situation – most real-world problems have multiple interests. Following are strategies that help in value creation:
Add multiple issues that interest you and potentially the counter party
Bring in a 3rdparty; to help build trust and bridge the value gap
Negotiate contingency contracts for managing riskier and uncertain issues
Advantages of Value Creation in negotiation
Add flexibility in negotiations; avoids haggling or fixated to one divisive issue (Ex: price)
Allow ‘Trade-off’: give-up less value in an issue in exchange for more value in other.
Allow for a “Package deal’, maximizing package value; and not ‘maximizing’ single interest.
‘Pareto Improvement’; i.e. a value creating change to the deal, that makes one party better-off, without hurting the other, hence ‘no money is left on the table’
Preparation Strategies (before negotiations)
Identify your multiple interests.
Create a scoring system for the valuation of interests, then prioritize interests.
Calculate a total ‘Package Reservation Value’.
Identify counter parties potential interests.
Execution Strategies
Negotiate multiple interests simultaneously (allowing trade-offs)
Make ‘package offer’
‘Leverage differences’ of all types to create value (use trade-off and not compromise)
Post Negotiation Strategies
Always acknowledge great progress made in the negotiations.
Suggest, there are aspects that could be improved: acknowledge counter-party might feel the same.
Suggest you have already conceded everything, but willing to think ‘out-of-the box.’
Be clear, you are looking for an ‘improved-agreement’ but an ‘new-agreement’ for both.
References
1-Lax, David & Sebenius, James: "3d-Negotiation." Harvard Business Review Press, 2006
2-Malhotra, D. and Bazerman: "Negotiation Genius. Bantam Dell, 2007