Negotiation Skills in M&A Transactions

Part One The 5 Stages of the Negotiation Process

• All negotiations, consciously or unconsciously, go through a number of logical steps:

• Stage 1 : Planning and preparation for negotiation Objective-building and fact-finding

• Collecting the evidence (organising the facts)

• Stakeholder analysis (identifying the key decision-makers)

• Position perception

Stage 2: Enquire and Test Assumptions

• Build rapport & create a positive environment

• Avoid hostility under all circumstances

Stage 3: Propose

• Make the offer first or let the other party make the first proposal

• Deliver your proposal with little emotion

• Never offer your final position at the start

• Aim high whilst being reasonable

Stage 4: Bargaining using M&A negotiation tactics

• Trade concessions rather than make concessions

• Avoid “irritators” and overly frequent counter-proposals

Stage 5: Close

• Summarise key elements agreed

• Discuss the next steps and tasks assignment

Case Study I: Initial negotiation role play. Participants will play the role of either a buyer or a seller to practise the five stages of negotiation. They will negotiate with each other in groups of two professionals. We will compare the results across the group and discuss the pros and cons of the different approaches used.

Negotiation Personalities

• Typical M&A negotiation roles include:

• The leader is generally the negotiator with the most experience

• The good guy is the person with whom most of the members of the opposing team will identify

• The bad guy attempts to make the opposition feel that the agreement could stall at any minute

• The hardliner takes a tough line on everything

• The sweeper picks up and brings together all the points of view expressed and then puts them forward as a single coherent case

• Experienced negotiators know how to switch roles depending on the situation

• Case Study II: Reflect on your own personality and what role(s) you currently play or would like to play in M&A negotiations. Exchange with the other participants and hear different viewpoints

M&A Negotiation Strategies and Techniques

• The ten fundamental principles of negotiation techniques Have a BATNA (Best Alternative to a Negotiated Agreement)

• Master the ZOPA (Zone of Possible Agreements)

• Set maximum and minimum objectives

• Keep analysing the deal variables

• Always aim high

• Never give a concession – always trade it

• Keep the whole relationship in mind

• Know when to walk away from a deal

• Know the negotiation process

• Select an effective bargaining negotiation strategy

• Change your strategy if necessary, but never change your BATNA

The six rules of influence: reciprocation, scarcity, authority, commitment, liking and consensus

BATNA

• Before the negotiation, decide what you will do if nothing comes of the negotiation

• Unless you have a plan B, your anxiety may reach dangerous levels

• BATNAs set the threshold in terms of the full set of interests that any acceptable agreement must exceed

• Both parties doing better than their BATNAs is a necessary condition for an agreement

Zero-sum fallacy

• The zero-sum fallacy is a situation in which a participant’s gain (or loss) is exactly balanced by the losses (or gains) of the utility of the other participant(s)

Resolving deadlocks

• Difficulty in reaching an agreement due to valuation or risk allocation issues

• Breaking deadlocks by finding a mutually agreeable solution Understanding the causes of the deadlock

• Identifying potential contingent considerations: earn-outs, clawbacks, escrow accounts, indemnities & warranties insurance

Part Two Reminder: Structuring the Offer to Enhance Value

• Start with cash-free, debt-free transactions

• Normalising working capital and CAPEX (Capital Expenditure)

• Completion accounts vs lockbox

• Assessing the key value drivers

• Bridging the value gap Deferred compensation and earn-outs

Representations & warranties as a tool for limiting exposure

Valuing synergies

Indemnities and an escrow account

Warranties and indemnities insurance

Negotiating key terms between signing and closing

Final Case Study – Introduction

• The participants will be split into two groups: a buyer (a multinational company) and a seller (a private equity firm)

• The key focus will be on negotiating and executing deals smoothly and correctly in the best interest of the parties, while arriving at an acceptable solution for both parties

Final Case Study – The M&A Role Play

• The seller has been running a competitive process and has received non-binding offers from several parties

• One of the buyers is trying to obtain exclusivity and has asked for a meeting with the seller to discuss their bid and the key clauses of the SPA (Sale and Purchase Agreement), including: Pricing and timing of payment;

• Closing mechanism: locked box vs completion account;

• Earn-out or deferred payment structures;

• Representation & warranties and related indemnities;

• An escrow account, bank guarantee, warranty & indemnity insurance;

• Management retention through stock options;

• MAC clause

Training Objectives

• Gain an overview of the merger and acquisition negotiation process in multiple stages, such as the preparation, planning and bargaining.

• Be introduced to the typical negotiation roles and let the experienced negotiators know how to switch roles depending on the situation, including planning and preparation for negotiation steps.

• Have explained to them the ten fundamental principles of M&A negotiation methods and techniques, as well as the six rules of influence: reciprocation, scarcity, authority, commitment, liking and consensus.

• Master the BATNA (Best Alternative to a Negotiated Agreement) and ZOPA (Zone of Possible Agreements).

• Learn about trading concessions to maximise the financial negotiation skills between the two parties.

Training Course Summary

This M&A negotiation training course has been developed to provide principal investors, bankers, lawyers, consultants and other M&A professionals with the key soft skills to negotiate and close a sell-side or buy-side transaction in a structured and uniform approach.

Our trainer will discuss the main negotiation techniques, including reciprocity, BATNA and trading concessions. The trainer will also cover key M&A mechanisms to structure the offer to enhance value, including earn-outs, “lock-box” and “completion accounts”, synergies, representations & warranties, etc. The participants will then role-play in separate groups on an M&A case study to practise M&A negotiation tactics with participants playing buyers and sellers.

Our M&A negotiation course will refer to relevant cases drawn from both England and US jurisdictions. Participants will also be given cases to reinforce learning objectives.