Quadrant IV: Quantum Leap
Step 3: Negotiating the Deal
accrued. This sets the stage for determining what price you should be willing to pay for the target company.
• Using an “accretive” approach that enables your company to add to earnings per share as soon as possible. This approach looks for acquisition synergies that are expected to increase earnings per share. This may mean looking for opportunities for such things as cross-selling of the acquired company’s services to the acquiring company’s client list or turning the acquired company’s research into salable goods and services, all of which will have a
significant impact on your bottom line. The value-creating approach emphasizes pursuing both short-term and long-term opportunities for gains, but in a more holistic framework.
• Recognizing the relationship between the due diligence process and the shaping of your business plan. Doing due diligence provides information that leads your company to be more exacting when negotiating the deal and when integrating the company following the purchase. This knowledge helps frame your business plan; it enables you to look at a range of options to see what is possible and what is not possible; and it helps you determine what to give up on (and what not to) in the
upcoming negotiation and integration phases. If you follow this process, at the end of the due diligence period, your business plan will be well into its development.
• Setting the ground rules for establishing an atmosphere of trust and a partnering context.
• Checking whether the assumptions of your business plan are holding during the due diligence process and beyond, and determining what modifications you need to make.
“This is the best price we can pay, and because we are the rightful owner, it is probably the best price that anybody can pay.” In short, you need to demonstrate to your target company that you can offer the best value.
The concept of the rightful owner is that the acquiring company finds target companies where its own business logic and its own integra- tion capabilities enable it to provide greater value to stakeholders than the current ownership configuration can currently provide.
Your goal during negotiations is to achieve a value proposition where your company will gain a desired return on your investment in the target company. You need a payback at a certain rate and over a specific period of time to satisfy your company’s threshold and hurdle-rate requirements and to ensure that you will realize a return on equity. If those results can be obtained in the first six months, then you can pay a higher premium for the target company. However, if you have to wait for, say, two years to get those results, then the integration process will incur more costs, which means that the amount you are is willing to pay up front will be less.
Negotiations are the venue to ensure that the elements for both potential expense synergies and potential capability synergies are incor- porated into the final agreement. Negotiations also cover caveats, repre- sentations and warranties, and related risk areas in the agreement. If everything works out, your company will make payments to the target company, but if things fail to work out as agreed, the selling company is liable to compensate you, the buyer.
And this can involve a substantial sum; for example, one acquirer claimed back $180 million from the selling company out of a $1 billion purchase price; the claim went to court, and there was a settlement in favor of the acquiring company. In negotiations, the acquirer protects itself against eventualities in ways that will help it manage the risk. Good due dili- gence will indicate risk areas and enable the negotiation team to incorpo- rate adequate recourse for areas with a significant but uncertain outcome.
Although the negotiations phase is primarily handled by the senior leadership of the acquiring and acquired companies, it cannot be detached from the things that have gone before or will follow in the acquisition process. In fact, it can be supported by a range of people from
across the company who know what special requirements and issues need to be addressed during the negotiation phase so that significant chal- lenges are addressed.
Negotiations are also an opportunity to get close-up experience of the negotiating skills of the senior managers from the target company. If your acquisition is consummated, these managers may take on significant roles in the newly combined company. Negotiations can provide a good view of how these leaders determine value as well as how they think and act in important and intense circumstances. Good negotiation skills are a very valuable capability in any number of settings in the new company.
The goals of the negotiations process include the following:
• Put forward the case for why you want to acquire the target company.
• Present potential growth synergies to the target company.
• Map out the advantages created by these synergies (both expense and growth synergies) and how the added value generated by these synergies will be distributed to your company and to the acquired company.
Case Example: How Dow Chemical Handles Negotiations Here’s how Randy Croyle of Dow Chemical describes his company’s nego- tiations process:
There are always challenges. I would rather use [the word] “chal- lenges” than “mistakes.” Folks who are in negotiating sometimes do not understand a lot of the IT implications. Dow has an ERP system.
We use SAP R2. We are so linked together by systems, so integrated between our customers, our supply chain, our manufacturing organi- zation, our finance, etc., that we cannot make a decision in one area that won’t have an impact someplace else. The problem is that when you are negotiating a deal, you may think, “Fine, we’ll agree to this or that,” but not understand that there are implications on the systems that can create significant heartburn and costs. That is the challenge.
More times than not, trying to get folks with operational experi- ence on the negotiation team is a big help. People just do not recognize how complicated it is to run a business in a fully integrated company.
• Protect your company against eventualities to help manage risk.
• Determine what is included in and what is excluded from the deal.
• Prevent your company from “falling in love” with your target and losing track of what your boundaries are in terms of hurdle rates. Your company should always be prepared to let the targeted acquisition go.