How to avoid a bidding war

When negotiating against competitors for a prized contract, think outside the box.

By on / Business Negotiations

In the National Basketball Association (NBA), signing an endorsement deal with footwear giant Nike has become a rite of passage for newly anointed superstars. Save for a few notable deals by Adidas, Nike has dominated the practice of paying top talent millions for the right to sell lines of collectible shoes in their names.

This past August, sportswear and footwear supplier Under Armour made a bold play to change that. Basketball star Kevin Durant of the Oklahoma City Thunder was reaching the end of his seven-year, $60 million endorsement deal with Nike, and Under Armour, which only entered the footwear market in 2006, was looking to make a big splash. Durant is a well-liked player who became the NBA’s Most Valuable Player after averaging 24 points per game in the 2013–2014 season.

In a detailed presentation at its Baltimore headquarters, Under Armour offered to pay Durant $265 million to $285 million for a 10-year sponsorship deal that included promises of company stock and the construction of a community center named for his mother. The offer represented almost 10% of Under Armour’s total marketing budget, according to Kyle Stock of Bloomberg Businessweek.

Rapper Jay-Z’s sports agency, Roc Nation Sports, which represents Durant, reportedly gave Nike less than a week to match the offer or walk away, according to the terms of Nike’s contract with Durant. Calculating that it couldn’t afford to lose Durant to an upstart competitor, Nike agreed to match—despite the fact that it could be looking at a money-losing deal.

Consider this analysis from Stock: Nike pocketed about $112 million from the sale of its “KD” line (Durant-branded gear) in 2013. The company is said to spend 11% of its sales on “demand creation,” which includes advertising expenditures and payments to athletes. To keep Durant’s average annual payments of $27.5 million per year at 11% of sales of its KD line, Nike will have to book about $250 million in KD revenue annually—roughly double the line’s current sales.

In its negotiation with Durant, Nike was faced with a question that haunts buyers in competitive markets: Should you compete for a scarce commodity and risk overpaying in a bidding war or stay out of the race and risk being left behind?

In fact, buyers are rarely limited to such either-or choices. Here are five other options you might exercise to gain an edge—and avoid a bidding war.

1. Get a jump on the competition.
Nike appeared to have been caught off guard by Under Armour’s attempt to lure away Kevin Durant. It certainly was surprised—and probably dismayed—by the size of its competitor’s offer.

As the buyer in a business relationship, your power is likely to decrease as the number of competitors rises. Therefore, your primary goal should be to keep negotiations one on one.

Your participation has value. Negotiate concessions in exchange for staying in the game.

You can take several steps to reduce the need to bid against one or more competitors for a contract you hold. First, solidify the relationship by demonstrating your commitment and excellence throughout the life of the deal. Second, begin the renegotiation process well before the contract’s end date. Third, emphasize the unique assets, beyond price, that you bring to the relationship. With any luck, you’ll wrap up a new deal before your competitor has a chance to put forth an enticing offer.

2. Don’t undervalue yourself.
What if your client is proactive about shopping for a better deal, as Durant and his management team were? Imagine, for example, that a longtime customer informs you that it is putting your soon-to-expire contract up for bid in an online auction that will be awarded based on price alone.

In such cases, don’t assume you have to accept your customer’s new process terms, advises Harvard Business School and Harvard Law School professor Guhan Subramanian in his book Dealmaking: The New Strategy of Negotiauctions (W. W. Norton, 2011).

You might schedule a meeting with your customer and inform her that your company won’t be participating in the auction. Explain that you predict the winner of the auction will have to sacrifice quality to deliver on price. Then open up a conversation about ways you might improve the existing contract for both sides.

As Subramanian notes, your participation in a negotiation has value. Rather than giving that value away, negotiate concessions in exchange for staying in the game.

3. Consider a coalition.
Sometimes in negotiation, you can avoid a bidding war by finding ways to partner with your competition. Of course, antitrust laws bar you from forming alliances that could harm consumers, as Apple learned the hard way when it was found guilty of colluding with five major book publishers to set prices for e-books.

Yet there are perfectly legal ways to head off certain types of competition. In recent years, for example, individual ranchers and farmers have formed “wind associations” that allow them to negotiate leasing rights to their land with wind developers as a group. Rather than competing with one another for deals with single developers, the landowners market their group property rights to numerous companies, sometimes triggering their own bidding wars in the process. Similarly, companies can team up to offer a higher-value package to a prospective client, as in the case of two consulting firms bundling their services.

The lesson: Don’t assume you and your competitors have to be at odds. Consider whether there are legal and ethical ways for you to collaborate rather than outbid one another.

4. Negotiate matching rights with care.
Granting a buyer the right to match or improve upon another bidder’s offer within a set period of time can be a win-win move for both buyer and seller, according to Subramanian. Such so-called matching rights, or rights of first refusal, give buyers the opportunity to stay in the game and sellers a chance to explore their options. Once used exclusively in large mergers and acquisitions, matching rights are now incorporated into all types of deals across industries.

Because matching rights are often imprecisely worded in contracts, however, they can create new problems. It may be unclear, for example, if a buyer will end the contest when it matches a third party’s bid or if the match will trigger a bidding war.

Similarly, matching rights may limit, or appear to limit, the competition to a single issue: price. This fact can constrain buyers from competing on other issues and sellers from shopping for the best all-around deal.

Finally, when adding matching rights to their contracts, buyers often overlook the importance of having ample time to decide whether to match a competitor’s offer. Sellers and other prospective buyers may take advantage of this fact by making exploding offers with short fuses, notes Subramanian. Roc Nation Sports appears to have used this tactic in its negotiations with Nike on Durant’s behalf.

For all these reasons, don’t blindly accept your lawyer’s boilerplate language on matching rights the next time you sign a contract. Instead, negotiate for terms that will lessen your odds of overbidding if a contest arises down the road.

5. Guard against competitive arousal.
In negotiation, no matter how well we prepare, the desire to “beat” another party may lead us to make irrational decisions that go against our best interests, such as bidding well beyond an item’s value in order to defeat a rival bidder in an auction. This type of competitive arousal is a natural human response that is likely rooted in our fight-or-flight instinct and therefore difficult to overcome, according to Harvard Business School professor Deepak Malhotra.

Fortunately, two safeguards can help us stay focused on what really matters. First, because we are most susceptible to competitive arousal when we’re under time pressure, do what you can to slow down the clock. That means pushing back when a client or competitor tries to get you to make quick decisions about whether to bid higher.

Second, because negotiators feel pressured and become more competitive when they’re performing in front of an audience, work to keep your negotiations private. That might mean negotiating one-on-one rather than as part of a team, asking your boss to stay out of the room, or making a “no leaks” pact with other parties to keep observers, such as the media, from tracking your progress. (For more on the risks of taking public disputes private, see the article on page 7.)

In sum, when you’re considering making a significant purchase for yourself or your organization, don’t assume you have less power than the seller just because she has something you want. With advance planning and careful strategy, you can take steps to reduce your competition and increase your odds of walking away with a fairly priced prize.

5 ways to avoid overpaying:

  1. Start contract renegotiations well before competitors have a chance to move in.
  2. When invited to an auction, press for one-on-one talks instead.
  3. Consider options for teaming up with your competitors.
  4. Negotiate the fine print in your contract rather than accepting boilerplate on matching rights.
  5. Avoid overbidding by keeping talks relaxed and private.

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