The past summer of frenzied corporate dealmaking has underscored the importance of complex negotiations to the success not just of mergers and acquisitions, but to the leadership effectiveness of those executives and other relevant parties at the bargaining table.
Beyond the headline-grabbing flurry of recent transactions, worth almost $4 trillion since the start of the year, is a sequence of delicate negotiations playing out on multiple fronts and involving numerous stakeholders.
At IMD, we have noticed a burst of interest in classes on negotiation, which is a key leadership skill that many people lack. Negotiation once took abackseat to other academic disciplines such as finance, but it has captured the corporate zeitgeist following this year’s deals boom.
And the lessons learnt are invaluable in a wide array of management scenarios, from dispute resolution to pay discussions and infrastructure projects, mergers and sales. Nearly 40,000 deals have been struck since January, pushing M&A activity to highs not seen since before the financial crisis in 2007.
We do not expect the deal frenzy to slow down, either, in the next financial year, given the rock-bottom interest rates, surge in corporate earnings and bullish sentiment on the global economy among our business school participants. Despite some macroeconomic headwinds, these executives tell us they are pursuing growth-boosting deals to expand into new geographical markets and industry verticals, or acquire new capabilities, often in technology.
While the headline figures for transactions would suggest that many successful talks are taking place, the reality is more complex. McKinsey research shows about 10% of all big deals never cross the finish line, because of issues related to value creation, regulation or politics. The consequences can include wasting time and resources, incurring advisory and termination fees and damaging the reputation and share prices of the parties involved.
While many corporate leaders are astute negotiators when it comes to day-to-day business operations, they often lose their way when it comes to leading complex, cross-border tie-ups. The approach is too often reactive, but successful dealmaking demands a more strategic method.
It involves rethinking the importance and value of ESG, managing investor activism, building effective teams, and determining the best way to buy or sell an asset. We have put together a framework based on our experience teaching international negotiations and value creation through M&A. The insights are applicable to a broad church of management challenges.
The cardinal sin in M&A is overpaying for targets, but company valuations are high in today’s runaway stock markets, which has raised takeover premiums for buyers. So negotiators will need to stress revenue synergies and cost savings to get deals over the line.
Acquirers often see deals as a way of generating value for their own shareholders, but they should focus on what they can offer the other party too, whether growth capital, managerial oversight, or sharing skills, assets or capabilities with the other side.
We believe that transaction success hinges on long-term value creation and strategic fit. Increasingly, companies are looking at value in terms of environmental, social and governance (ESG) factors. Dealmakers are having to consider ESG factors in their due diligence, as issues of climate change, inequalities, diversity and inclusion play a more prominent role in negotiations.
Companies need to know when to auction and when to negotiate. Executives often sell off divisions or subsidiaries of their organization using auctions, which have become more popular with sellers looking to quickly find a host of potential bidders. And, using competition among buyers, sellers can drive up the sale price.
Choosing between an auction or a private negotiation will depend on many factors, but the trade-off between transparency and secrecy will be a crucial consideration. This can determine the valuation of the asset: if bids in an auction are miles apart, the seller is probably missing out on money in the deal.
A case in point is the 2004 auction for Cable and Wireless America (CWA), which attracted two key bidders. Savvis Communications made an offer, hoping to diversify its customer base and generate synergies with existing operations. Gores Technology, a private equity firm, also placed a bid with the aim of restructuring CWA, then selling it on for a profit.
Savvis won the auction with a $168 million bid, and its share price surged by a third on news of the deal, boosting the company’s market capitalization by some $85 million. This suggested that CWA was actually worth about $250 million.
Savvis picked up the asset at a bargain, because it only had to slightly outbid its rival. A private negotiation would have negated this information advantage, likely resulting in a bigger sale price.
Another important consideration is the role of activist shareholders, who are becoming more influential in M&A transactions. Often, activists will take a stake in a public company after a bid has been announced, in the hopes of improving the terms of the offer.
Perhaps the best-known example is US activist hedge fund Elliott Management’s intervention in American brewer Anheuser-Busch InBev’s proposed £71 billion takeover of smaller rival SABMiller, in 2016. Elliott held a 1.46% stake in SABMiller though its UK business, and wrote to the board of the South African brewer raising concerns about the structure of the deal.
AB InBev offered investors a choice to be paid either in cash or mostly stock, but a plunge in the value of sterling after the Brexit vote widened the gap in value between these options. Following pressure from Elliott, AB InBev subsequently increased its offer to £79 billion to appease rebellious investors.
The rising influence of activist investors in transactions underscores the importance of the social capital of those at the negotiating table. It’s important that executives understand and anticipate stakeholder concerns about deals ahead of time. Negotiators should be active, constantly speaking to all of their stakeholders, grasping their interests and concerns.
In a complex negotiation, leaders have to use not just their own intelligence but the acumen of their team. Who they bring with them to high-level talks is a vital consideration. Each member of the delegation will have a unique strength, and leaders will need to draw on these talents to negotiate successfully, which is a team sport. For example, some people are gifted at reading and decoding signals from non-verbal communication.
Unfortunately, diverging interests among teams can derail high-stakes deals, so leaders will need to be courageous enough to confront these issues and unite teams beyond a shared goal. This might mean leaving people out of the negotiation, and choosing only those who are team players and can nurture relationships across different stakeholder groups. Such traits are usually surfaced during strategy meetings.
Other times, people might become emotional during the negotiation and give away crucial information that weakens the bargaining position. Role-playing the negotiation before the fact can help to uncover these issues, so they can be ironed out in a safe space to support successful dealmaking.
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