Private Negotiation, Public Auction, or Both?

By carefully assessing their interests and goals, sellers can choose the right dealmaking process.

By on / Business Negotiations

When Amazon and Apple each began scouting locations for a new campus this past year, we might have expected them to follow a similar search process. But, in many ways, their searches have been polar opposites:

  • Amazon set off a frenzy in September 2017 when it announced it was soliciting bids from cities interested in hosting its second headquarters, known as HQ2. Dangling the prospect of a $5 billion campus and about 50,000 jobs, the e-commerce juggernaut attracted proposals from 238 cities and regions across North America, which it narrowed down to 20 finalists—ranging from Austin, Tex., to Washington, D.C.—in January. The informal auction won Amazon months of publicity, which will undoubtedly heat up again later this year when the company announces the winning city.
  • On May 23, the Wall Street Journal reported that Apple CEO Tim Cook had held a secret meeting with North Carolina governor Roy Cooper to discuss the possibility of building a large, new customer-service facility in the Raleigh-Durham area. Cook’s public schedule for his visit to North Carolina omitted the meeting. Apple had revealed in January that it was planning to open a new campus to house technical support staff but has largely kept quiet about the choice of location.

When putting an asset on the market, sellers face a choice between negotiating one-on-one with buyers or holding an auction. Amazon has gone the auction route (albeit unconventionally), while Apple appears to be negotiating privately with a small number of top contenders (and perhaps even just one).

The question of which process to choose—or whether to use a hybrid process known as a negotiauction—is a crucial one for buyers. Drawing on guidance from Program on Negotiation chair Guhan Subramanian’s book Dealmaking: The New Strategy of Negotiauctions (Norton, 2011), we review the most important factors to consider when deciding which process to use.

Price competition versus value creation

In a March interview with Recode and MSNBC, Apple CEO Cook was asked whether Apple’s search for a
new campus would mirror Amazon’s. He demurred: “We’re not doing a beauty contest kind of thing. That’s
not Apple.” Cook criticized the type of competition that Amazon was holding for putting contestants “through a ton of work.” He continued, “You have a winner and a lot of losers, unfortunately. I don’t like that. . . . The best thing we can do in business is to find the win-win.”

As Cook suggests, because auctions tend to involve competition on a single issue, price, they can become win-lose contests that crowd out all other issues. By comparison, in negotiation, parties generally have many more opportunities to create value by discussing a range of issues and identifying preferences and tradeoffs among them.

In its instructions to HQ2 applicants, Amazon tried to broaden bidders’ focus beyond tax incentives by presenting a clear “wish list” for its host city or region, including a large and diverse labor pool, existing buildings, cell- phone coverage, and high quality of life. Nonetheless, many competitors felt compelled to offer hefty tax incentives to stay in the running. “Whatever it takes,” Tulsa, Okla., mayor G.T. Bynum told the New York Times. (Tulsa didn’t make the final cut.)

In auctions and other types of price competitions, bidders often offer more than an item is worth—and sometimes more than they can afford. Whether sooner or later, the winning bidder is likely to experience regret over the purchase, a phenomenon known as the “winner’s curse.”

In sum, when you hope to build a long-term partnership with a buyer, private negotiation can be a better choice than an auction because of the greater opportunities it offers to build rapport and trust. But for one-off deals in which price is the major issue, you might choose to hold an auction instead.

Secrecy versus publicity

Sellers may prefer to negotiate rather than hold an auction when they or their potential buyers put a premium on privacy. For example, organizations typically negotiate mergers and acquisitions quietly, for fear that employees will start looking for new jobs and bring down the value of the target company.

As compared to Amazon’s well- publicized competition, Apple’s low-key approach is the more common one for companies scouting new locales. More than 90% of companies don’t say where they’re looking, Jay Biggins, the executive managing director of corporate-location strategy firm Biggins Lacy Shapiro & Co., told the Wall Street Journal. A public auction can bring unwanted scrutiny and even negative publicity to a seller. Consider that Amazon’s HQ2 race will end with one winner and 237 losers. Communities that poured resources into perfecting their bid, as many did, could come to believe it was a waste of time and feel frustrated as a result.

Bidder profiles

The number of interested buyers and their characteristics should also factor into a decision between a negotiation and an auction, writes Subramanian in Dealmaking.

When you’re likely to attract multiple enthusiastic bidders, an auction will generate the best price competition. By contrast, if there’s a chance only one or two bidders show up, or none at all, individual negotiations would generally make more sense.

But it’s not necessarily the case that the more bidders, the better. A large auction can quickly grow unwieldy and require significant resource outlays to manage. In addition, a huge auction could scare away high-value bidders who don’t want to play on a wide-open field. For these reasons, in many contexts, the sweet spot to aim for is five to eight bidders, according to Subramanian.

Sellers also need to consider their ability to identify interested buyers. If you would have difficulty identifying high-value bidders, it may be wise to hold a public auction, which could bring them out of the woodwork. By contrast, if you already know which companies can meet your needs (take the case of the U.S. government seeking bids on an aircraft carrier), you could instead negotiate one-on-one with the obvious contenders.

Finally, when one potential buyer is likely to value what you’re selling much more than other bidders (for whatever reason), you’d generally be better off negotiating privately with that party. Why? If you hold an auction, that interested buyer will need to bid only slightly higher than the next highest bidder to win the prize—and could get a great deal as a result. You may be able to get much more from that buyer by negotiating privately and anchoring with a high sale price.

How about a negotiauction?

Sellers may be able to avoid making some of these difficult tradeoffs— competition versus value creation, for example, or many versus few bidders— by engaging in a negotiauction. In fact, most real-world sales of significant assets are negotiauctions: that is, they incorporate features of both negotiations and auctions, according to Subramanian.

A negotiauction involves private, one- on-one negotiations between the seller and various buyers, as well as one or more rounds of bidding and other forms of direct competition among potential buyers. Let’s imagine how Amazon’s and Apple’s location searches could (and perhaps will) turn into negotiauctions. Having narrowed the field down to 20 finalists, Amazon could now negotiate individually with all or some of these finalists to try to get better deal terms. As for Apple, after negotiating with several cities or regions, it could then ask them all to submit their best-and-final offers, with the knowledge that they will be competing against one another, and then choose the best one. Such carefully crafted and sequenced hybrid approaches might serve parties better than an auction or set of negotiations.

These are only the basic outlines of negotiauctions, but the message is clear: Sellers should be open to borrowing from the best of both worlds— negotiations and auctions—to ensure they get a great deal. In fact, buyers can also try to shape the process to their advantage, as in the case of an auction contestant who approaches a seller about negotiating privately to move beyond the single issue of price.

3 other seller considerations

When deciding which process to use, sellers should also keep the following concerns in mind, writes Guhan Subramanian in Dealmaking:

1. Asset specificity. The greater your ability to specify what your asset is, the more conducive it is to being auctioned. By contrast, when an asset is ill defined, negotiation is generally the better route. For example, the U.S. government has had a lot of success selling securities, which are homogenous and appealing to many buyers, at auction. But in the aftermath of the 2008 financial crisis, the government concluded that auctioning off toxic assets, which vary widely across a range of characteristics, would be a mistake.

2. Speed. When you or your likely bidders are in a hurry, you may prefer to hold an auction. By contrast, when you have the time to explore interests, generate options, and create value, negotiation may be a better choice.

3. Risk. The speed of auctions is associated with greater risk. If no bidders or only one bidder shows up, you may have squandered your ability to get a good price. When you negotiate, by contrast, you can test the waters gradually and move on if it becomes apparent you’re not going to reach a satisfactory deal.

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