The buyer might respond as follows: “We appreciate your flexibility on the currency issue, but we cannot pay the price you are asking and still do the deal. However, IF you will agree to accept our stock as currency for the whole transaction, THEN we can offer you an increase of 5 percent on the price and we may be able to discuss a consulting contract with you that will pay you a little cash over the next six months.” And so it would go.
Integrative bargaining is more skillful than haggling, but it is no less competitive. In Transactions, therefore, don’t be surprised if the other side resorts to firm tactics such as insisting you make two concessions before it makes one and stalling the negotiations at an impasse even as it uses integrative bargaining techniques.
Firm tactics in support of high expectations help each party test the other’s leverage and see if the other side is inclined toward accommodation and compromise. Any investment banker or other professional deal maker will tell you that high-stakes negotiations can go through many tense episodes before each side is satisfied that it has tested the other party’s limits and is ready to close.
Making Concessions in Balanced Concerns Situations
In a Balanced Concerns situation, where both the future relationship and the stakes are roughly equal in importance for both sides, a variety of different bargaining and problem-solving procedures work. The goal is to address as many priorities as possible, make sure that each side gets its “fair share” on such issues as price, and maintain good working relationships between the parties going forward.
Because the stakes matter, you should still come to the table with high expectations. You will want to move slowly on your least important issues first and use the conditional “if . . . then” formulation for concession making. All trades should be reciprocal.
Because the relationship matters to both sides, more imaginative kinds of bargaining tactics are both possible and desirable than is the case in Transactions. Aggressive, hardball moves and transparent gambits do not work well. They are too bruising to personal feelings and usually obscure the shared interests the parties bring to the table. Instead, each party needs to probe more deeply into the real needs underlying the other side’s demands and seek imaginative solutions.
Suppose we face the same video store acquisition as I discussed above, but the acquiring firm desperately needs you to stay with the company after the deal and run your store for at least another year. The acquiring company still wants to pay no more than a fair price, but now it wants a relationship with you, not just your store. How might this change its approach to concession making?
First, the buyer will want to avoid a bruising tug-of-war over price that might ruin the prospects for a good working relationship. It will be less likely to open by “talking to the mountain,” and, if it does, it might very well explicitly describe its opening as merely “a way to get us started” or as “fully negotiable based on your needs.”
The buyer’s negotiators should also be more interested in developing or maintaining trust for the future relationship. This means giving you more (though by no means complete) information on their priorities and needs during the information exchange stage.
Once the opening round is over, they may begin proposing several different packages at the same time, asking you to identify the one that you prefer. You may get to evaluate a medium-price, all-stock, delayed-closing proposal next to a deal involving a low-price, fifty-fifty cash-and-stock structure with an early closing. This procedure helps you see how the issues trade off against one another from their point of view. You might adjust one of the proposals as you see fit and pass it back across the table. That proposal would then be the baseline from which you both move forward.
Finally, they will very likely get creative in their effort to bridge your mutual interests. Moving “outside the box” of the term sheet, they may offer you stock options with vesting rights at some future date and give you bonuses for hitting new, profitable sales targets. These ways of paying you are designed to encourage you to stay with the firm long enough to cash in on the bonuses while you introduce their people to your customers and show them the ins and outs of your business.
Interest-based, problem-solving approaches to bargaining work well in a Balanced Concerns situation. Why? Because they give parties a chance to “make the pie bigger” both within the context of the transaction at hand (by using integrative bargaining techniques) and the larger framework of the parties’ ongoing relationship (by creatively exploiting their ability to help each other in the future).
Indeed, if the parties have a high degree of trust in each other, a problem-solving approach to bargaining may not involve concessions at all in the usual back-and-forth sense. Rather, the parties may spend much of their time dreaming up new ideas that might meet everyone’s needs. Research suggests that the more options people develop in this sort of brainstorming process, the more likely they will be to stumble over something that works far better than a simple compromise.
Reseach suggests that genuine conflict between people over their legitimate goals, which many well-meaning people try to avoid or minimize in the name of harmonious human relations, actually helps energize the collaborative problem-solving process in a Balanced Concerns situation. A clash between two people with well-considered high expectations can motivate creative thinking as both sides strive to solve their problem, maintain their principles, keep their relationships in working order, and hit their targets. People with a problem-solving style have a talent for using conflict to keep the bargaining process going without letting the conflict degenerate into a personal battle.
A Brief Note on the “Good Guy/Bad Guy” Routine
There is one concession-making ploy that competitive negotiators use so often in high-stakes deals that it deserves a special mention. This is the “good guy/bad guy” routine. You know you are up against this when you find yourself liking one of the other side’s negotiators and wishing another one would jump off a cliff. Another sign: The other side’s representative tells you that your demands sound reasonable to her—but that someone else who isn’t there (the bad guy) would never agree.
The good guy/bad guy gambit draws its effectiveness from a number of psychological phenomena we have met before. The good guy opens the negotiation with some friendly rapport-building chatter about shared interests and goals. The good guy appeals to our tendency to like people who agree with us and who are familiar and similar, as discussed in Chapters 4 and 8.
The bad guy then takes over when it comes to the opening. He opens at an outrageous level or attacks our proposal, as the case may be. This aggressive, confrontational moment startles us, creating a vision of potential loss as we see the deal disappearing and begin thinking about the further compromises we may need to make. The bad guy wants to lower our expectations and anchor us at his end of the bargaining range so we will make our adjustments from there.
Just about when we are ready to quit because the bad guy is not moving on anything, the good guy steps back in and insists that the bad guy make a concession. This makes the good guy an advocate for the norm of reciprocity and we like him even more. We start looking at the good guy as a champion of reasonableness and begin taking his advice about what needs to be done to bridge the gap between our side and the bad guy.
In this way, the good guy/bad guy routine takes advantage of the contrast effect we discussed in connection with optimistic openings. The good guy—who might appear demanding if viewed alone—looks reasonable, if not saintly, when seen sitting next to Godzilla. You are more likely to make concessions to the good guy because he seems so much nicer and his demands look so comparatively attractive.
The way to counter the good guy/bad guy routine is simple: Name the tactic publicly at the table and demand clarification on the issue of authority. Fight fire with fire.
“It looks as if one of you is playing the good guy and the other is playing the bad guy,” you might say. “I had hoped we could use a more s
traightforward process to reach a fair deal. Before we proceed further, I would like to know who has authority to agree to what. I cannot negotiate with people who lack authority to close.”
If the bad guy is a lawyer or other adviser, throw him or her out. Insist on trading directly with the decision maker. Let the “deal makers” take over from the “deal breakers.”
Summary
As you move through the opening and concession-making stage, remember that your strategy and tactics should be determined by three main elements: the situation (Transaction, Relationship, or Balanced Concerns?), your leverage (who has the most to lose?), and your own and your counterpart’s style (are you or the other person predictably competitive or cooperative?).
Each of the four quadrants in the Situational Matrix carries its own presumed best concession strategy: competitive for Transactions, accommodating for Relationships, and interest-based problem solving for Balanced Concerns. Compromise is a useful tool—though not a preferred strategy—in all three situations.
As your leverage goes down, your need to soften your approach rises. And as your leverage rises, your need to accommodate goes down—regardless of the situation you are in.
Opening and Concession-Making Summary
10
Step 4: Closing and Gaining Commitment
Make every bargain clear and plain
That none may afterwards complain.
—ENGLISH RHYME
The master is not he who begins but he who finishes.
—SLOVAKIAN FOLK SAYING
The negotiation process concludes with an endgame: closing and gaining commitment. Closing can be smooth and simple or a time of high anxiety. People who like to negotiate relish the fast-paced tactics that can surround this stage. Those who do not like bargaining sometimes feel uncomfortable and pressured.
And if closing gambits such as splitting the difference, walkouts, and ultimatums do not raise your blood pressure, there is always the problem of securing commitment to actual performance. Is the other side’s word enough to cement the deal? Perhaps. But what other steps may be necessary to ensure that the other party will keep its promise?
Calling the Barbarians
To start, let’s examine the final stage of bargaining in one of the biggest, most hotly contested deals of the twentieth century: the 1988 sale of American tobacco and food giant RJR Nabisco (RJR). The full story of this remarkable transaction is chronicled in Barbarians at the Gate.
RJR Chairman Ross Johnson set the sale in motion by proposing a management-led leveraged buyout (LBO) with financial backing from the upstart investment banking department of Shearson Lehman Hutton. Johnson’s initial offer: a record-breaking $17.6 billion, or $75 per share for stock that had been trading in the forties prior to Johnson’s bid. Johnson’s stunning move sparked interest from several possible buyers, but the contest came down to a test between two rival teams: Johnson and his friends from Shearson versus Henry Kravis and Wall Street powerhouse Kohlberg Kravis Roberts and Company (KKR).
Both sides were determined to win this battle. KKR’s reputation as the premier buyout firm on Wall Street was on the line. When he first learned that Shearson intended to finance the RJR deal without KKR, Kravis reportedly said, “This deal is so visible, so big . . . I can’t lay off. We have to be in on this deal. And we will be in this deal.”
Using the Situational Matrix discussed in Chapter 7, exactly what sort of situation did the parties face in the RJR deal?
Many business mergers and acquisitions are Balanced Concerns (Quadrant I) situations. The parties negotiate hard over price, but they must also be mindful of future relationships because the acquired firm’s management will stay on after the purchase and run the company. These conflicting incentives somewhat soften the bargaining tactics parties use.
Johnson and his group had wanted a “cozy,” relationship-based negotiation with Johnson’s handpicked board. But Kravis spoiled that by entering with his own bid. With two potential buyers, the board put RJR up for sale in a hotly contested and legally regulated “auction.” Personal relationships mattered little. Money—a lot of it—was the sole issue. The RJR deal became a pure Transaction (Quadrant III). Competitive bargaining tactics were the order of the day.
“WE NEED AN EXTENSION”
We enter the scene near the end of the story. It is 12:30 P.M. on November 30, 1988. Kravis has made a “final,” mind-boggling $24 billion bid for RJR: $106 per share. He has given the board only thirty minutes to make a decision. Thirty minutes from now the bid will be considered withdrawn and Kravis will walk away.
Kravis is sitting with his partner George Roberts and several advisers in a cramped office at a New York law firm. The two men are tense but optimistic.
Down the hall, a special committee of “outside” directors from RJR’s board (members who are not employed as executives by RJR) is meeting. They are considering Kravis’s $106-per-share offer and have managed to keep the auction going without letting either the Shearson side or the KKR side know the other side’s latest bid. The negotiations have been going on for days. The pressure for a final decision is enormous.
Unbeknownst to Kravis, Ross Johnson’s team has just submitted a last-minute bid made up of both cash and a substantial component of “junk bonds” and other fancy securities. The bid totals $108 per share, slightly more than Kravis’s $106. The bid has placed the board in a quandary.
If the board sells to Kravis for $106 with Johnson’s bid for $108 in hand, it faces lawsuits from RJR shareholders. The board’s legal duty is to sell RJR to the highest bidder. But the board is not sure if Johnson’s bid is really worth $108. The high-risk junk bonds make this uncertain.
So the board needs time to analyze Johnson’s bid—and time is exactly what Kravis’s deadline has taken away from them. The board sends its lawyer, Peter Atkins, down the hall to negotiate with Kravis for an extension to KKR’s 1 P.M. deadline.
At twenty minutes to one, Atkins knocks at Kravis and Roberts’s door. The two men look up in anticipation. This is the moment they have waited for. They are about to do the biggest deal in the history of capitalism.
“We have received something,” Atkins says cryptically, “and we can’t live with your one o’clock deadline. We need an extension.”
Kravis and Roberts both bristle. They know exactly what the “something” must be—an offer from their rivals. They had imposed their deadline to block just this move.
“Absolutely not,” says Kravis.
Let’s push “pause” on the replay at this point. Kravis has imposed a deadline, the RJR board has attempted to wiggle out of it, and Kravis has responded. What are the parties up to? What psychological triggers lie behind this fast-paced maneuvering? Let’s look at two key psychological factors that often play a role in the closing stage of negotiation, the “scarcity effect” and “overcommitment.” As we do so, we’ll continue to follow the RJR story to see what happened.
Closing Factor 1: Injecting Urgency by Using the Scarcity Effect
One of the most primal and powerful psychological levers in every negotiation is what psychologists call the scarcity effect. This label refers to our human tendency to want things more when we think the supply is running out. As discussed in Chapter 6 on leverage, your ability to get what you want in negotiation often depends on the other side’s perception that it has something to lose from a “no deal” result. You can and often should appeal to scarcity arguments from the very beginning of the information exchange stage. But it is usually at the closing stage that these arguments are tested most strenuously.
As stated in the research, “Scarcity enhances the value of anything that can be possessed, is useful to its possessor, and is transferable from one person to another.” When we think something we want is or is about to become scarce, we push an imaginary panic button labeled “Act Now” to avoid feeling regret that we missed an opportunity.
When the weather report calls for heavy snow, it is th
e scarcity effect that sends people racing to grocery stores to buy up all the milk and other perishable necessities. Place a single cookie on the dining room table in front of two young, hungry, and otherwise preoccupied kids and then say, “There’s a cookie on the table. Who wants it?” The ensuing scramble is living proof of the scarcity effect. Lease new office space for your company with only three windowed offices and six senior executives, and you may see a grown-up version of the same behavior.
Clever negotiators use many devices to exploit the scarcity effect and bring the bargaining to a crisis. Several of them were on display in the RJR negotiation story.
SCARCITY CAUSED BY MANY PEOPLE WANTING THE SAME THING: COMPETITION
First, astute negotiators try to emphasize that what they have is in great demand, and the supply is dwindling fast. They discuss their other offers or competing opportunities, hoping their opponents will feel the added pressure of the scarcity response and push the “Act Now” panic button to beat the competition.
In the RJR case, the board constantly emphasized its other offers, trying to get both sides to raise their price. Indeed, it was the auction atmosphere that prompted Kravis to inject his own note of urgency, the 1 P.M. deadline.
There really was another offer in the RJR case, so the scarcity was real. Only one firm would get RJR. But in many competitive situations the other side will try to bluff about scarcity, creating a vision of competition even when yours is the only real offer on the table.
Bluffs are a common event in negotiation, particularly in Transactions. I will discuss the ethics of bluffing in the next chapter. For now, it is enough to know why people bluff about things like competition: They do it to trigger the scarcity effect in the other party.
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