Are you using integrative negotiation techniques to help close deals?
Like a contingency, a condition to a deal is a related though one of the less common integrative negotiation techniques. A condition is an ‘if’ statement like a contingency, but, whereas a contingency depends on unknown future events, a condition is entirely within the control of the parties involved.
Propose Conditions to Entering Negotiations
Recently a couple was interested in buying a vacation house on Martha’s Vineyard, an island off the coast of Massachusetts.They found their ideal retreat and submitted a bid, only to learn that the seller had just received another offer.
The seller suggested an auction between the two bidders. The couple agreed, but only under the following conditions:
(1) as a single round sealed bid auction with the seller bound in advance to accept the higher offer; and (2) also has had to include a specific dollar amount (rather than, say, ” $1.00 more than the higher offer).
The seller could either reject the couple’s conditions and be left with only one bidder or accept the ultimatum and achieve a one round auction. The seller accepted the conditions, and the couple won the property at what they perceived to be a reasonable price, thanks to conditions that avoided an all-out-bidding war.
Your entry into a negotiation often carries its own value. Your integrative negotiation techniques help you close the deal.
The couple’s bid on the vacation home was valuable to the seller seeking an auction. When your entry has such value, don’t give it away (see also the negotiation concepts of reservation price, anchoring, and zone of possible agreement [ZOPA]).
Instead, propose negotiating conditions that extract process terms to your advantage.
Propose Conditions to the Negotiated Agreement
Once you’re seated at the negotiating table, deal conditions can shape the game to your advantage.
In February 2005, telecommunications giant Verizon made an offer to acquire MCI. Qwest Communications, a much smaller industry player, made a competing bid that also triggered a multi-round bidding contest.
Verizon won in the end, but at a purchase price $1.5 billion higher than its initial offer.
Could Verizon have deterred Qwest from entering the auction?
Possibly, through a condition to the deal. The keys was Mexican billionaire Carlos Slim Helu, who held 13.7% of MCI stock. If Verizon had acquired Slim’s stock when it announced its initial bid, it would have gained a significant toehold that might have deterred Qwest from bidding.
Of course, if Verizon had approached Slim directly, he would have said no, eager for a bidding contest that would drive up the shares. But by making Slim’s shares a condition to the MCI deal, Verizon would have pressured him to sell.
Consider Slim’s alternatives: if he rejected Verizon’s condition, his stock would continue to trade at the $15.00 to $18.00 level. Verizon’s offer was $20.75 per share, about 30% more than Slim’s no deal alternative – presumably incentive for him to accept the condition, though it would have reduced the odds of a profitable bidding contest.
Instead, Verizon and Qwest were off to the races. After two months, Slim sold his shares to Verizon at $25.72 per share plus interest payments and call options on Verizon shares.
“Mr. Slim played his cards well,” wrote the Wall Street Journal. Conditioning the initial deal on Slim’s shares could have countered the billionaire’s shrewd gambit.
Propose Building Coalitions Into the Negotiated Agreement
Conditions can also be built into the deal itself. Unlike a condition to the deal, a condition built into the deal guarantees compliance with the negotiated agreement, and is one of the smartest integrative negotiation techniques.
Consider NBC’s 2001 negotiation to renew the hit television show Frasier, owner by Paramount Studios.
The show had aired for eight seasons on NBC, which had to decide whether to renew for three more.
One contentious issue: whether NBC would get a “cut back right” to cancel the show before the contract ended if its ratings fell.
“We felt that it had one good year maybe two, but that the third year could potentially be disastrous,” said NBC West Coast President Mark Graboff.
Under pressure from Kelsey Grammer, the show’s star, Paramount refused the cut back right. The reason was noneconomic: by lasting three more seasons as Frasier, Grammer would have played the longest running primetime character in television history (with nine seasons on predecessor show Cheers and 11 more on Frasier).
NBC proposed a contingent contract that would give it the right to cancel Frasier is ratings fell below a certain level in the critical 18 to 49 year old demographic. This textbook play was a nonstarter for Grammer, who had his eye on the record books.
NBC eventually caved on the issue and the two sides reached a deal at about $5.4 million per episode with no cut back right.
A condition built into the deal might have given NBC more headway with Grammer.
Consider this possible offer from NBC: Offer 5.2 million per episode without a cutback right or 5.5 million per episode with a cutback right. This condition would have passed off NBC’s problem to Paramount, which would gain a strong financial incentive to pressure Grammer to accept a cut back right. Could Grammer have resisted the collective pressure? We can’t know for sure.
But with the benefit of hindsight, the condition built into the deal may have had more success in NBC’s attempt at a contingent contract.
Conditions to the deal and conditions built into the deal often shift the coalitional game, transforming your problem into their problem. An otherwise opposing party gains a strong incentive to push a third party to fulfill the conditions, thereby creating value for the proposer. Such conditions could subtly but powerfully shift the ground beneath a deal blocker.
Integrative Negotiating Techniques to Closing the Deal
When a delay exists between the contract signing and closing deals, consider integrative negotiation techniques as another bargaining chip in your talks.
Conditions to closing such as financing and a suitable inspection are common in a residential real estate sale. During a downturn in the housing market buyers should be more aggressive in extracting favorable conditions to closing such as insisting on waiting for the successful sale of one’s current house.
The seller in an unfavorable marketplace should be willing to absorb such risk, particularly if the buyer’s current house is easier to sell than the seller’s.
In mergers and acquisitions, conditions to closing often reflect parties’ relative bargaining power.
One ubiquitous condition that targets board spin mergers and acquisitions deals typically insist upon to fulfill their fiduciary duties to shareholders is that the deal can be nullified if a higher bidder for the target appears between the signing and the closing.
Buyers understand that this is one of the integrative negotiation techniques that is nonnegotiable, but they try to limit their risk by insisting on a “no shop” clause which prevents the target board from actively soliciting higher value bidders.
However in today’s dealmaking environments where massive pools of private equity money chase too few targets a new term has appeared: the “go shop” clause. Naturally, targets desire such clauses which allow them to seek out higher bidders as they add flexibility and heighten the odds of a better deal.
Which integrative negotiation techniques helped your negotiations?
For more information on the concept of multiple equivalent simultaneous offers (or MESO negotiation), please read Dealmaking and Business Negotiations: Why You Should Make More than One Offer.
Originally published in 2013.