The $23 billion acquisition of H.J. Heinz. Michael Dell’s planned $24 billion buyout of his namesake computer company. The $11 billion merger of American Airlines and US Airways. Office Depot’s $976 million, all-stock acquisition of OfficeMax.
These high-flying deals were announced one after the other this past February. The mad rush to consolidate and partner signaled that Wall Street dealmakers and corporate executives are regaining confidence in the wake of the global financial crisis.
Whether or not we’re entering another mergers and acquisitions (M&A) boom remains to be seen. But, for the moment at least, a rebounding stock market and banking system, fattening corporate coffers, and greater political certainty in the United States and Europe seem to have culminated in a burst of creative dealmaking.
What can negotiating professionals take away from the recent M&As and buyouts? In this article, we present three key questions that are important to ask when you are facing a significant negotiation, and we explain how parties involved in some of the most recent deals answered them.
1. Who might influence a reluctant counterpart?
It’s a common problem in negotiation: You have a vision for a deal that will take both sides to the next level, yet the other side won’t even come to the table. In such situations, persuasion techniques and other communication skills will take you only
so far.
In their book 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals (Harvard Business School Press, 2006), David A. Lax and James K. Sebenius suggest that an indirect route to your target may be the best strategy. Through a process they refer to as backward mapping, you can think in reverse about how to reach your preferred outcome and then ensure that you are approaching negotiating partners in the right order.
That’s what US Airways CEO Doug Parker appears to have done after American Airlines head Tom Horton initially rebuffed his advances, as reported by Mike Spector in the Wall Street Journal. Parker first called Horton to discuss a possible merger on November 29, 2011, the very day that American filed for bankruptcy. But Horton said his airline needed to spend time reorganizing and renegotiating its labor contracts before focusing on a deal.
4 steps for backward mapping
By negotiating first with American Airlines’ pilots union, US Airways CEO Doug Parker secured an agreement that caught the attention of American’s leadership. Draw on the principle of backward mapping in your own deals by following these four steps from David A. Lax and James K. Sebenius:
- Make a map of all the counterparts who could potentially be involved in your negotiation and consider their interests.
- Estimate the costs and benefits of getting each party on board with your plan.
- Identify the patterns of influence and deference among these parties. Who listens to whom? Who owes something to whom?
- Consider what agreements need to be in place to secure your ultimate target’s cooperation. Whom do you need to negotiate with first, and how can you win that person over?
Undeterred, Parker launched presentations on Wall Street to tout the benefits of a merger with American. And in March 2012, US Airways president Scott Kirby had a pivotal meeting with Captain David Bates, then the president of American’s pilots union. It was no secret that American’s pilots were unhappy with their company’s management, which was pressing them for pay and benefit cuts. Kirby launched informal contract negotiations with the pilots by outlining how US Airways would treat American’s union members. Bates was intrigued. US Airways’ Parker and Kirby then traveled for a secret meeting with the board of American’s pilots union in Dallas.
On April 20, catching Horton off guard, US Airways announced that all of American’s large unions supported a merger between the two airlines. The same day, US Airways issued a formal merger proposal to American and its creditors.
After initially ignoring the offer, American agreed to explore a possible consolidation, with its creditors serving as mediators. Confidential negotiations led to a new proposal from US Airways in November: American’s shareholders, creditors, unions, and employees would get 70% ownership of a combined airline, US Airways’ shareholders would get 30%, and Parker would run the company.
In December, the airlines and their pilots unions spent 15 intense days negotiating detailed agreements on how to integrate their workforces. Thanks to concessions from the unions, new labor contracts are expected to save American hundreds of millions of dollars annually. In February 2013, the two companies unveiled their merger, which was widely praised as a critical step in industry consolidation and seems likely to receive regulatory approval.
Pivotal to US Airways’ success was CEO Parker’s recognition of the importance of negotiating with American’s pilots first. Their enthusiasm for a merger and new management made it difficult for Horton to continue resisting negotiations with American.
2. How will the deal affect your rivals?
Office Depot’s intended purchase of OfficeMax, announced on February 20, was widely praised as an important step toward consolidating the office-supply industry, which has suffered from a glut of stores in the midst of competition from Amazon.com and other Internet retailers, and declining demand for paper and ink.
Somewhat lost in the praise was the potential impact of Office Depot and OfficeMax’s merger on their rival, Staples. The day after the merger announcement, shares of Staples rose 13%. That marked a market-capitalization gain of $1.1 billion—about three times the amount of the combined $314 million gain for Office Depot and OfficeMax.
“If there are benefits from this office-supply-store merger, investors seem to be saying that they are going to Staples,” wrote Justin Lahart in the Wall Street Journal. The merger known as “OfficeOffice” is likely to close stores and lessen the pressure of market over saturation on Staples, which could also snare new corporate customers if the integration gets off to a rocky start.
This relief for Staples may not last, given industry trends, but it does point to the importance of considering how the outcome of your negotiation will affect outside parties, including your rivals. Will benefits accrued by outside parties outweigh any gains you expect to receive? Is it possible that these benefits will allow the outsider to sabotage your best-laid plans? Assess in advance whether there will be enough value to go around—or if you could end up losing out to a newly bolstered competitor.
3. What will happen next?
If negotiating a merger between two complex corporations seems difficult, integrating the companies is even harder.
When Office Depot and Office- Max announced their partnership, they had yet to resolve a number of key questions, such as what the combined company would be called, who would lead it, and where it would be located. In part, the lack of details can be attributed to the fact that the merger was accidentally announced prematurely because of a third-party error. Office Depot then had to scramble to put together a public announcement without taking the time to negotiate the implementation stage.
More often, companies flesh out basic organizational plans during the negotiation process. US Airways and American, for instance, agreed that US Airways’ Parker will lead the newly christened American Airlines Group from American headquarters in Fort Worth, Texas. And, as noted earlier, the company has a head start on labor negotiations.
But the challenges of this consolidation are daunting, as Jack Nicas reports in the Wall Street Journal. The carriers must take American out of bankruptcy, pass a Justice Department antitrust review, and integrate their massive operations—an effort expected to cost about $1.2 billion over three years. Meanwhile, rivals United and Delta Airlines could swoop in to steal any customers who face headaches from disruptions caused by the integration.
The merging companies also must navigate a potential culture clash between American’s buttoned-up style and US Airways’ more casual, off-the-cuff approach to business. The companies have appointed transition teams to try to get off to a strong start.
In Horton’s words, the deal represents “great value creation, but it’s all dependent on execution.” Acknowledging this reality is the first step in ensuring you don’t sign on to a deal that will fall flat during the implementation stage. Armed with a thorough, clear-eyed appraisal of what could happen next, you and your organization will be able to take a long-term view of likely challenges and better assess whether you should follow through with your plans
3 takeaways for your most complex deals
- Map backwards. When faced with a reluctant counterpart, think about what other parties you might approach first. The agreements you reach with these parties may help you make inroads with your ultimate target.
- Anticipate rivals’ reactions. In the midst of your negotiations, take time to analyze how third parties in your sphere may be affected—both positively and negatively—by your deal.
- Look beyond the contract. Because the deal isn’t done when the ink dries, devote a significant percentage of your negotiation time to planning how you will implement your agreement.