Top eight insights from my buy-side M&A negotiation practice
In a recent call, Florian Bauer asked me to prepare a short video training for his students with some insights from my buy-side M&A negotiation practice.
You may know that he is a professor at Lancaster University, ranked #1 in the world in MBA for Corporate Strategy by the Financial Times.
Thank you very much, Florian, for this invitation.
Let me start with an overview of my experience on the M&A buy side. Over the past 15 years, I have evaluated several hundred potential M&A opportunities and accompanied some of them in the negotiations, mostly from the corporate buyer perspective as Head of M&A of probably one of the most reputable agricultural machinery manufacturers in the world and also as M&A advisor through my own company Westfälische Corporate Finance GmbH.
Before I share with you my personal M&A negotiation practice, please note my disclaimer: Don't expect too much. Every M&A transaction and negotiation is very individual and therefore cannot be made successful with a cookbook. Therefore, use my recommendations with diligence and feel free to call me if you want to prepare for an M&A process.
Lesson Learned #1
starts with the negotiation concept: My experience is that the larger the transaction, the more professional and similar the negotiation concept.
So, below I will focus my recommendations on this collaborative and fair negotiation style where both parties share the same values and have a long-term interest in maintaining their good reputation in the M&A community.
You may all be familiar with the Harvard concept. The basic idea of this concept is to create win-win situations based on interests rather than positions, and to separate people from issues. This concept is very common in the M&A context.
If you are in a negotiation, don't come up with solutions too quickly, but take the time to define mutually accepted, objective decision criteria and objectives for the negotiation, describe and expand the entire option space, and mutually share all relevant information to avoid misunderstandings. And take advantage of 10-minute breaks for the consultations within your team.
The larger the transaction, the more likely you are to find a negotiator who understands the Harvard concept and respects the principles of a fact-based, fair negotiation style.
Lesson Learned #2
Take enough time to prepare yourself with sufficient people and data research and consistent due diligence results.
Try to find out the interests of the other party and write down your own interests, minimum and maximum negotiation objectives, create an option space with all conceivable and reasonable scenarios for you.
Negotiation is basically very easy if you understand and actively listen to the people you are dealing with, be respectful, know their motivations, personal interests and roles in the organization.
So you need to do some research on the people and the content you want to negotiate. Any negotiation should be based on facts, not emotions or positions.
Start with desk research, always be curious and continuously expand the fact base with further analysis during the due diligence phase regarding strategy, people, finance and all other relevant business functions and ensure data consistency through cross-checks and intelligent Q&A sessions. The better the due diligence, the easier the negotiations.
Prepare a preliminary business plan and issue list prior to negotiations, and for each issue, consider whether, first, it might be relevant to be included in the share or asset purchase agreement, or, second, whether it should be used to negotiate a price discount, or, third, whether the resulting cash flow requires an update to your integration concept and business plan.
Lesson Learned #3
Avoid M&A Fever - Develop and evaluate realistic and strong alternatives that you will choose if negotiations fail.
You will be much more successful and powerful in negotiations if you have a real alternative. In the M&A context, the biggest mistake the unexperienced make is to get stuck in M&A fever. That is, you fell in love with your target company. You've put so much time and money into negotiations and due diligence that you think you can't stop. Some think they'll lose reputation if they skip a deal. Basically, of course, you are playing to win and to succeed in the negotiations and you are fighting to find common ground and to come to a deal. You should set a reasonable price range for the deal up front. But if you see a deal breaker and no solution is found in the negotiations to manage the situation, or if the price is outside the range you set before the negotiation, you need to stop the negotiations or the M&A process even on the day of signing.
And the best way to be strong enough to walk away from a transaction is to build realistic alternatives. In theory, this is called BATNA: the best alternative to a negotiated agreement.
And you have to keep in mind: There is always an alternative.
Lesson Learned #4
Take the Lead in Negotiations and Play Fair.
If you take the lead and are the first to define the M&A process and draft a process letter with the single point of contact, make the agenda proposal for the negotiations, or present the draft share or asset purchase agreement, you usually have some tactical advantage if you do it right.
Your proposal should always be fair and balanced and anticipate the interests of the other party. If you are unfair, you will usually experience unwanted reactions from the other party, which can cause a bad negotiation atmosphere, reactance behavior, and too much emotion, which you should avoid. If you have the chance to be the first to set the framework for the negotiations with your proposal, it is important not to abuse it and take away the other party's room for reaction. You should never take away too much of the other party's freedom to make their own decisions.
Lesson Learned #5
Strictly manage communication channels throughout the M&A process and document everything.
In any M&A negotiation process, you need to define and strictly manage the communication channels and document everything, not only for legal reasons, but also to know all the information that could affect the valuation of the target company. You need to know all this in order to keep track of everything, to prevent the occurrence of misunderstandings during the negotiations and to be well prepared regarding potential issues during the negotiations.
Lesson Learned #6
Bring Deal Breakers to the Table Early and Start with the Big Picture.
When you start negotiating, after building up confidence, it's best practice to bring up all the major deal breakers right at the beginning to ensure you don't waste time on details and discover major issues only at the end of several weeks of costly negotiations or due diligence work. So make sure you agree on major cornerstones of an agreement first and identify potential deal breakers early in the process. A questionnaire covering all key business functions is helpful in identifying major potential issues.
Lesson Learned #7
Bring your issues and concessions forward strategically. Don't bid against yourself, and don't just focus on prices, but on other terms as well.
Prepare a list of your issues and concessions. Don't give in if the other party doesn't move the same way. If you bid, wait for a counteroffer before reducing your demands.
Point out to your negotiating partner the value of the concession you are giving up. Offer to give up something only if he meets a condition. Make concessions in installments, because it is psychologically more valuable to make smaller concessions than a large concession of the same size.
Prices are important, but don't neglect other conditions that may also have an impact on future cash flow. You should also consider the likelihood of the cash flow from the issue to occur.
Lesson Learned #8
Stay cool when the other party tries to use unfair negotiation tactics.
When the other party makes extreme demands followed by small, slow concessions: Don't let a strong demand dictate your expectations. Make your own set of expectations, alternatives, and end result clear, and don't let an aggressive opponent confuse you.
Commitment tactics: Your opponent may say that his hands are tied or that he has limited authority in the negotiations. Make sure these commitment tactics are real.
Try to get you to shrink: Your opponent keeps making demands and waiting for you to reach your breaking point. Don't let this fool you.
Personal insults and confusion of ideas: These personal attacks can feed your insecurities and leave you vulnerable. Put on a thick skin.
Bluffing, puffing up and lying: Exaggerating and twisting facts can catch you off guard. Be polite but skeptical.
Threats and warnings: Recognizing threats and one-sided warnings as tactics can help you resist them.
Downplaying your alternatives: Get a clear picture of your best alternative to a negotiated agreement (BATNA) and don't let your opponent discourage your commitment.
Good cop, bad cop: one of your opponents is reasonable, the other is tough. Realize that they are working together and get your own cop if you need one.
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