From ice caps to earn out caps – how do aggressive negotiating stances impact M&A deals and what to look out for as sellers.

Earlier this week, Donald Trump’s ex-advisor, IBM Vice Chairman Gary Cohn, suggested Trump’s threat to take Greenland through force was “over the edge” and actually just a “negotiating technique”. Whilst we cannot comment on Trump’s underlying intentions, Crohn’s comments do provide food for thought on the topic of aggressive negotiation strategies: 

1. Why might someone take this approach?
2. Is such aggression useful for M&A?
3. How can Sellers respond?

Some believe such approaches can distort the middle ground, and potentially improve what is agreed as a compromise. Whether or not this is what Trump will experience is open to debate but in terms of M&A, we believe it will often cause more harm than good. In this blog we will set out why and what Sellers can do to manage their processes assertively.

When it comes to negotiation and communication there is a useful three-point continuum to consider:

1. Assertive – A party values their own needs and seeks to balance that with the counterparty’s;
2. Aggressive – A party values their own needs at the expense of the counterparty; and
3. Passive – A party values the counterparty’s needs at the expense of themselves.

Whilst the a passive approach might seem unlikely, it is common. Many Sellers are unadvised and whilst they may know broadly what they want, they are often unaware of their needs and unable to gauge how reasonable a counterparty is being. Without a negotiating buffer, communications can become reactive and emotional, increasing the risk of responses which sacrifice value.

If we use a pair of weighing scales to represent an M&A transaction, agreement represents balance.  

If one party is aggressive and values their interests above the other’s, a makeweight is required to keep equilibrium. The first to crack may passively offer up this value to keep the deal alive. As alluded to by this analogy, the aggressive and passive states reflect a ‘Zero-Sum’ mentality. 

However, if a Buyer and a Seller both think assertively, they can identify ways to help their counterparty without compromising value. By doing so the deal becomes increasingly attractive to both parties. This ‘Win-Win’ deal is typically done faster than the alternative, as there is greater confidence and trust in negotiations. 

When the relationship must continue post transaction, there is further reason to be assertive. Reinvestments, Earn Outs and Deferred Consideration all require trust, and in its absence, bulletproof legals, which take time, money and lots of calls with. Even a seller agreeing traditional warranties doesn’t want to be looking over their shoulder in case of a rogue claim. Aggression therefore increases a transactions expense, timetable and execution risk.

A M&A transaction is often a six-to-nine-month project, and the second half of that timetable requires collaboration between parties. Buyer and Seller need to understand early on if a counterparty is worth their time, effort and investment in fees. If aggression is present early on, the well-advised will typically walk away and seek an alternative deal elsewhere.

Of course it isn’t always that straight forward; at some point in most projects each of the three mindsets appear in some shape or form. Most commonly, some Buyers may even take an assertive approach for the initial phase of the transaction, build some rapport with the Seller and intentionally become more aggressive under exclusivity. This reflects an awareness that once Heads of Terms are signed, the power shifts from Seller to Buyer. Where Vendor Due Diligence is not cost effective, this is a risk which needs to be managed up front.

Ultimately, this comes down to taking responsibility for those aspects of the process which the Sellside can control. Key areas of action include:

1. Early valuation work and soft market testing – Keeping expectations grounded in reality is important; without this, the Seller can accidently become the aggressor and unintentionally drive a Buyer to overpromise or leave the process.
2. Get ‘crystal clear’ on what is in it for the Buyer - The more the proposition addresses the Buyer’s needs and wants, the less resistance there is for the Seller.
3. Depth of preparation – Buyers will develop conviction if escorted through a process at a healthy speed with consistent information. When a process slows down or numbers start to change, that’s when Buyers question the deliverability and value of the proposition.
4. Buyer options – A Buyer pool which includes multiple Buyer groups cultivates options. A blend of constituents in each group enables the Seller to address a diversified pool of Buyers, meaning stronger competitive tension and limited dependencies.
5. Negotiating under competitive tension – Locking down as much of the key terms as possible before exclusivity is critical. In a balanced process, a Buyer should earn this and also should be aware that the Seller has alternatives that they are competing against.
6. Exclusivity only for well-educated offers – Whilst many Buyers won’t want to incur diligence costs before they secure exclusivity, performing some discrete and sensible procedures beforehand will help both parties have conviction in the bid. Buyers who embrace this are communicating assertively, whereas those who are dismissive without explanation should be considered higher risk.
7. Confirmation of terms throughout exclusivity – Regularly confirming the terms whilst going through due diligence can help hold the Buyer to account and communicate problems earlier. This can be a requirement of an exclusivity arrangement which incentivises assertive communication.
8. Keep next best options warm – Whilst Sellers should not talk to other parties under exclusivity, you can address this before signing the Heads of Terms. Without forewarning, it may be challenging to have options two and three ‘waiting in the wings’. If this step has been taken, Sellers should be more prepared to walk away when they need to.

This list is not exhaustive. Every process goes through its own unique ups and downs, and every Buyer and Seller will have their good and bad days. Whether you are in a process right now or considering how best to embark on one, we welcome a coffee and a chat to explain how we can help.

Written by Andrew Dickinson, Director, Corporate Finance