Negotiation in the News: The Amazon–Whole Foods merger: Scoring a table for two in a crowded field

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Imagine you’re competing with multiple parties to secure a coveted resource, such as your dream house, a cool invention, or a talented new hire. How might you stand out from the pack and win the prize? Maybe by finding a way to preempt the competition. That’s what Amazon recently did in its $13.4 billion acquisition of upscale grocer Whole Foods, as reported by Alex Morrell for Business Insider.

Food fight

For several years, Whole Foods has faced pressure to prop up its slumping stock price and reverse its declining profits. In April 2017, activist hedge fund Jana Partners revealed it had acquired a nearly 9% stake in the grocer and was seeking to shake up upper management, Business Insider reports.

Unwilling to surrender control of the company, Whole Foods CEO John Mackey and his team hired a leading defense banker from the advisory firm Evercore to fend off the hostile investors and help chart a path forward. Soon, potential suitors, including a competitor and private-equity firms, began making overtures toward Whole Foods.

The same week, Bloomberg reported that Amazon had been considering a bid for Whole Foods but had let it drop, according to Business Insider. Curiosity piqued, Whole Foods had an outside consultant reach out to Amazon to test the waters. Within a few days, Amazon confirmed it was open to meeting to discuss a merger.

Pressure Cooker

Meanwhile, in its own meeting with Whole Foods, Jana Partners demanded an overhaul of the grocer’s board of directors, among other changes. On Friday, April 28, the Whole Foods board met to contemplate its response. Mackey revealed that he and other company leaders were flying to Seattle that weekend to meet with Amazon.

Later, Mackey characterized the meeting at Amazon headquarters as “love at first sight.” But talks were only in the preliminary stages, and pressure from Jana Partners was mounting. Whole Foods offered the hedge fund two seats on its board in return for 18 months to pursue a new strategic plan. Jana rejected the offer, but Whole Foods replaced five directors on May 10 nonetheless, according to Morrell.

In the weeks that followed, Whole Foods engaged in talks with one competitor— the Albertsons supermarket chain, according to Reuters— regarding a potential “merger of equals” and with another competitor regarding a commercial supply-chain deal but not a merger.

Toasting a deal

On May 23, Amazon submitted a written offer to purchase Whole Foods for $41 per share, 17% above its $35 per share trading price. But Amazon, represented by Goldman Sachs, was adamant about two conditions: utmost secrecy and exclusive negotiations. If word of the talks got out or if Whole Foods wanted to auction itself off, Amazon would bow out.

Mackey characterized the meeting at Amazon headquarters as “love at first sight.”

On May 30, Whole Foods’ board met to discuss its options, which included pursuing deals with two competing grocers and four private-equity firms, in addition to Amazon. With Evercore cautioning that the buyout firms probably wouldn’t offer a better price than Amazon’s bid, Whole Foods decided to focus on doing a deal with the online retailer.

Whole Foods made a counteroffer to Amazon of $45 per share, or almost $14.4 billion. Amazon rejected the figure as too high and said it was thinking about walking away, but ultimately upped its bid to $42 per share, declaring that its best and final offer. Once again, Amazon warned Whole Foods not to approach other potential bidders and said it was prepared to close the deal quickly, according to later Securities and Exchange Commission filings.

Whole Foods snapped up the offer. Over the next two weeks, the companies quietly performed due diligence, successfully keeping their agreement under wraps. On June 15, they went public with the merger, announcing they had agreed on a price of $42 per share. Shares of Whole Foods temporarily surged as investors hoped for a bidding war, but no offers materialized in the subsequent few weeks.

The next course

Amazon’s purchase of Whole Foods marks “a major escalation” in the online merchant’s battle with Walmart for bigger slices of the $800 billion that Americans spend annually on groceries, according
to the New York Times. Whole Foods’ 460 brick-and-mortar stores put Amazon closer geographically to grocery shoppers; it could use the stores as delivery hubs or to lure members of its Prime service with discounted groceries.

For Whole Foods, the deal provides at least temporary relief from the intense pressure to boost profits and earnings. CEO Mackey portrayed the deal as a boon to the company, but some of his employees worried that Amazon might eventually automate their jobs or close stores.

A standard move for eliminating competition

Amazon successfully shut down its competition by making exclusivity a condition of its negotiations with Whole Foods. In his book Dealmaking: The New Strategy of Negotiauctions (Norton, 2011), Harvard Business School and Harvard Law School professor Guhan Subramanian notes that such shut-down moves can succeed at prematurely cutting off the competition in an auction or negotiation-auction hybrid.

To carry out an effective shut-down move, you will need to give your target an incentive to deal with you exclusively. This might mean making an eye-catching offer that your competitors are unlikely to be able to match. If you bring unique value to the deal that you can demonstrate to your counterpart, such as a reputation for prestige or opportunities to reach new customers, all the better.

Moreover, accompany your shut-down move with a credible threat to walk away from the deal if the target refuses to negotiate with you exclusively—and then be prepared to do so. Finally, note that shut-down moves are particularly likely to be effective when your target is under pressure to reach an agreement in a hurry, as Whole Foods was.

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