Adapted from “Hands Off! Negotiating Exclusivity” by Guhan Subramanian in the October 2005 issue of the Negotiation newsletter.
The clearest method for achieving exclusivity is an exclusive negotiating period, during which both sides agree not to talk to third parties, even if approached unexpectedly by others. In some arenas, these terms are called no-talk periods.
An exclusive negotiation period can facilitate deals in several ways. First, it allows both sides to signal that they believe that a zone of possible agreement or ZOPA exists; otherwise, they wouldn’t waste their time by agreeing to negotiate exclusively. This signal can help build the trust that parties need to explore joint gains. For example, when NBC and Paramount Television agreed to a 30-day exclusive negotiation period to take place in 2001 for the renewal of the hit show Frasier, the two sides implicitly acknowledged that there was no better home for the show than NBC.
Second, an exclusive negotiation period worsens both sides’ best alternatives to a negotiated agreement or BATNA, since both parties are “locked out” from talking to others in the event of impasse. The magnitude of this effect depends on the length of the exclusivity period. A one-year lockout, common in the world of mergers and acquisitions (M&As), harms BATNAs much more than the 30-day lockout typical of many commercial settings. Of course, in most negotiations, your goal is to improve your BATNA, not worsen it, to increase your bargaining power. In this case, however, both sides are worsening their BATNAs in roughly equal ways. If neither party is making a significantly greater sacrifice of walkaway alternatives, then agreeing to an exclusive negotiation period should have little effect on relative bargaining power or the outcome of the deal.
Third, an exclusivity period sets a clear deadline for negotiations. As such, it forces one or both parties to put their best and final offer on the table before the exclusivity period runs out. In effect, an exclusive negotiation period is the dealmaking equivalent of the “courthouse steps” bargaining that often produces a last-minute settlement in the litigation environment.
While these factors increase the likelihood of a deal, exclusive negotiating periods have their drawbacks. Exclusivity is quite valuable for the buyer with few options, but correspondingly costly to the seller who has many alternatives. As the seller in this instance, you should make sure you’ve fully exploited the benefits of nonexclusivity – negotiating with multiple parties an playing them off one another, for example – before committing to exclusive negotiations. In the bidding contest for Vivendi Universal Entertainment in 2003, seller Vivendi negotiated exclusively with General Electric only after General Electric survived three rounds of bidding and indicated that it was willing to pay more than the other remaining bidder. By opening with an auction, Vivendi ensured that its exclusive negotiations would be with the highest bidder.
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