First published in the Financial Times on 17th December 2013.
Executives who rush the process are likely to have a long time to dwell on their mistake
Negotiation plays a central role in life from an early age. Haggles over homework, discussions about sharing an apartment, buying a car or agreeing terms for a job – we must all negotiate all the time.
No doubt most of us believe that we are better negotiators than we really are. All business leaders should be especially willing to improve their techniques.
A recent film serves as a powerful reminder about two of the golden rules in negotiating a deal: be patient and do not get emotionally involved.
The film in question, A Hijacking, is a gripping tale about modern-day African pirates holding a Danish cargo ship and its crew to ransom.
I won’t spoil the plot of the film, but it is well worth watching as a study in how to calmly draw out the bargaining to get a better deal – even when the stakes are very high indeed.
The late Robert Holmes à Court, a master Australian wheeler dealer, once said: “It is a well-known proposition that you know who’s going to win a negotiation: it’s he who pauses longest.”
The way in which he gradually managed to take control of impresario Lew Grade’s entertainment empire ACC for a fraction of its underlying value was a classic example of his philosophy in action.
Bull markets, leverage and easy money have allowed a particular sort of negotiator to dominate in many situations: the guy who repeatedly offers more than anyone else.
At my firm we are outbid all the time at auctions for companies. Perhaps we are too cautious. But consistently being the highest bidder rarely works in the long run.
Economic cycles turn, and profits and multiples can fall as well as rise. Of course, it is a lot easier to pay lavish sums if you are using that wonderful material, other people’s money.
By contrast, at our firm a lot of the cash on the table is ours, so it is strictly rationed.
Those who are closest to an asset tend to know its worth best: be careful when they make you an offer. I have sold out of companies on a few occasions to insiders and often regretted it.
The creation of Twitter is a fascinating example of management buying a business back on lucrative terms.
Evan Williams had a start-up called Odeo – with a side project called Twitter.
In 2006 Mr Williams told his investors that Odeo was going nowhere, saying “I will continue to invest in Twitter, but it’s hard to say it justifies the venture investment Odeo certainly holds . . .”
So he made a proposal to buy them out – reputedly for $5m. Five years later, the assets he bought were priced at $5bn.
If I invest in a company, the headline price is only one factor. An acquisition that appears cheap might actually be much more expensive than it seems, and vice versa.
The management, balance sheet, commercial potential and continuing engagement of the vendor are among the many issues that influence one’s desire to buy, and the rationale of the purchase.
Usually negotiations over a corporate investment are multifaceted, for any contract needs a complex set of elements: warranties, due diligence, perhaps a carried interest in the project.
Most private companies sell only occasionally, and will probably have altered a lot by the time they next change hands. Meanwhile, expert valuations are mostly merely well-informed guesswork.
Tying up a deal in the past few years has taken twice as long as it did before the credit crunch. For me that is a positive development: when I rush an investment I usually make mistakes.
Inevitably you strike a better deal when you are keen but not desperate to close the transaction. If the terms are intolerable, then you should be able to walk away.
Having a choice of options – whether as buyer or seller – will surely generate a better outcome than having no alternative to fall back on. And a negotiation that leaves both sides feeling good is perhaps the ideal conclusion of any exchange.