M&A Directions: Preparing for Negotiations

In our first article in this series (Tips for a successful merger or joint venture) we emphasised the importance of ensuring that parties have consistent goals before proceeding with a transaction.

Once you have found a counter party with consistent goals, the next step is to negotiate the details of the deal. Over the years I have seen many approaches to this – some sophisticated and some far less so; some which work well and some which lead to an imperfect outcome for one or both parties.

There is no single set of rules for negotiating a successful outcome. The particular circumstances of your transaction should guide the approach that you take to the negotiation. However, regardless of the circumstances there are a number of considerations common to any negotiation which you and your team should think about carefully before you commence your formal negotiations.

1 Know your objective. Know the other party's objectives

Understand what you need (and do not need). Understand what they need.

In order to get the best possible outcome from your negotiation, it is essential to fully understand what you are seeking to get from the deal and to understand the position that those on the other side of the table are likely to take. It is crucial to understand not only what your “must haves” are, but also what you are trying to achieve from them.

For example, what do you expect to achieve for your company from this transaction? Is there a long term strategic objective or is it merely a shorter term financial transaction? In addition, you should find out as much as you can about the other party. What is their motivation for this deal? What is their history with similar transactions? Are there economic factors which are affecting the positions they may take? How does your preferred outcome impact on the tax position of the other party?

Take the time to understand your commercial and strategic objectives. Understand your company’s limitations and how the transaction fits with its business. For example, is an M&A target intended to be integrated into the existing business or operate on a standalone basis? If it is to be integrated then there may be aspects of the target’s business which are less important. If you are planning a joint venture, then you need to consider how it is envisaged that it will operate on a day-today basis and how the important decisions will be made.

After that, spend time thinking about the other parties to the negotiation, what their areas of concern might be, what you think their must have items will be, etc. To maximise your chances of reaching a successful outcome you need to understand the logic behind every position that you wish to take, and you need to be able to explain and justify these. If you do this, and you understand the impact on the other party, then it will be much easier to justify your position, or to agree to acceptable compromises, during a negotiation.

Discuss these with your team. What is your position on these items? Are there items that you cannot agree to? What can you offer in return? What will the other parties’ concerns be with your positions and how can you address these concerns? In essence, plan how the negotiation may evolve and the various permutations. When you undertake this process, you may not always get things 100% correct, but you should be much better placed to anticipate what the other parties will want to discuss, and be prepared with your response to those points. It will help make the whole negotiation a much smoother process. It will also demonstrate to the other party that you care about their objectives and are seeking a resolution that is beneficial to both parties.

Aim for a win-win outcome

There is a lot of literature outlining the distributive bargaining (win-lose) vs integrative negotiation (win-win) styles of negotiation. The concept itself is relatively simple – do you adopt an approach to your negotiations which is collaborative, empathetic and builds relationships and trust in order to ensure a mutually beneficial outcome for all, or do you use strong-arm tactics to steamroll the other side in order to maximise your own result while minimising theirs?

There are times when you will want to maximise your own position and minimise the other side’s result – most obviously in negotiations where you won’t or don’t need to have any ongoing relationship with each other once the deal is done. The simplest example of this is when you are purchasing a house – you are aiming to spend as little as possible while the vendor wants to sell at as high a price as possible. However, it will often be important to retain an ongoing relationship with the other party. This may be the case because you are trying to create a joint venture, or simply because your business will require ongoing interactions or subsequent transactions with the other party. If this is the case then you should try to ensure that both parties complete the negotiation process feeling they have achieved a good result and are confident about working together in the future.

Invariably some points will be trickier to negotiate than others, but there is generally a middle ground that will address the requirements of both parties. Getting to that middle ground can sometimes involve skill, diplomacy and patience. However if the other party is being totally unreasonable and the point they are refusing to budge on is one that is crucial to the deal from your team’s perspective, be prepared to walk away (see item 10 below).

Understand cultural differences – but don’t be afraid of them

Cultural differences are commonplace in negotiations in Asia. Not being aware of these can lead to a misunderstanding on both sides.

Your approach to negotiation should vary depending on the people with whom you are negotiating. For example, the typical approach an American party will take (which in my experience generally leads to a frank and forthright discussion) will be very different to the approach that a Japanese party may take (where culture typically discourages saying “no” – which can leave parties unsure of what has been agreed). Similarly, do not underestimate the importance of “face” or the impact of the hierarchical organisational structures that are typically found in China.

You should be aware of these issues and you should be sensitive to them, but you should not allow them to force you to concede a commercial outcome that is inconsistent with your objectives. Do not assume that terms have the same meaning in different cultures – In addition to dealing with confusion that can be caused by translation issues, certain cultures have different views on what is “standard”, how things should be done or what roles people have in an organisation. Don’t get caught out by assuming that you all have the same expectations.

You should also be aware that parties sometimes use foreigners’ perceptions of cultural sensitivities as a tactic to get their way! Do not succumb to this and always assess the negotiations from the perspective of what you need to get out of them.

2  Create the right team and know your roles

Gather the right team and prepare as a team

Ensure you have the right people on your negotiation team.This can make all the difference. You need senior people with gravitas who can speak on behalf of the company and who are willing to put their egos aside and do the right deal for the company. Consider whether it is appropriate to have the most senior people from your company in the room or whether you should hold back on having them present so that there can be an escalation path for any issues raised. You should also take into account who the other party will have on their teams and ensure that the teams are comparable – it can be harmful to your position if the other party has people who are significantly more senior, or who have significantly more expertise in a relevant area, than those on your team.

Ensure that your team clearly knows what authority it has to negotiate and make decisions, and that they know when they need to go back for approvals. Whilst they may not have “free rein” on all matters, they do need sufficient authority to be able to make most decisions in the room. Having to seek higher approval on a limited number of matters is acceptable. Needing to seek approval on everything merely demonstrates that the team does not have any power to negotiate.

Choose advisors for your team who are experienced, who know your business and your objectives, and whom you trust. Ensure your advisors have capability and experience in the areas that the deal will cover. Ensure they are the best and most appropriate advisors you can find for the type of deal you are doing. Ask their advice – they will have gone down the same or a similar path before and they will have seen the long term outcome of different approaches. Allow them to contribute during negotiations – this is their area of expertise and they can be a calm impartial advisor, presenting your side in a matter of fact way. Listen to their advice and assess it. Then decide what you want to do – you do not necessarily need to follow your advisors’ recommendations, but you should at least understand their advice – their experience can be invaluable.

No matter how well I know the client, I always suggest a meeting so that I can go through the negotiation documents with the deal team, go over our negotiation approach, agree on our ideal outcome, highlight areas of concern, identify the must-have items as well as the nice-to-haves and the items the team is happy to let go. Make sure your team is all on the same page, so to speak, before entering the negotiation room.

It’s also important to understand each person’s role in the negotiation – who will lead, who will make decisions. Tell your lawyer what role you want them to play during negotiations. Sometimes it is advantageous to have an experienced legal advisor taking the lead. Sometimes it’s better to have your most senior commercial team member take this role. Sometimes the best solution is a combination of both.

Whatever approach you take, it will be important that all of the team know and understand the positions that you will all take and the goals that you are all seeking to achieve. Go through them together as a team. I have seen numerous occasions where this has not been done and a team member – who was trying to be helpful – has jumped into a discussion and unwittingly conceded key points because they were not aware of how the discussion fitted into the “big picture”. Finally, your deal team should work together – everyone has something to contribute and should be free to offer their views. I have seen negotiations where the majority of the deal team have been too intimidated by senior people on the team to express their concerns with aspects of the transaction and contribute their expertise, and this often leads to bad deals.

Understand what your lawyers can do – and keep them under control!

On more than one occasion I have received a phone call from a client asking me to attend a negotiation the next day (or even that afternoon) and “negotiate the deal” for them. There is a view amongst some parties that lawyers can simply work their magic and achieve the right outcome. If only that were true!

Of course there are elements of any transaction document that a lawyer can look at and identify where a party is seeking something that is outside of the norm or unreasonable. We can also identify what will and won’t work from a legal perspective or what may cause problems from a technical perspective. We can advise on approaches that we have seen fail in the past and suggest alternatives. This is basic “bread and butter” stuff for transaction lawyers. However, it rarely goes to the heart of the transaction.

What is most important is understanding and addressing the commercial objectives of the parties. In order to negotiate on behalf of a party the whole negotiation team – including your lawyers - needs to fully understand those objectives.

If you decide that your lawyers will actively participate in the cut and thrust of the negotiations, then also remember that they may need to be restrained at times. Ensure that they understand their limits, what is important to you and what they should and should not fight for. I have seen negotiations where the commercial parties around the table have reached agreement on an issue, only to have the lawyer for one party try to re-open those discussions aggressively. This was because they personally did not like the agreed outcome and would have agreed a different outcome if it were up to them. Such an approach is rarely productive and can do serious damage to the negotiation process.

3  Decide whether you need an LOI or MOU

There are two distinct views on this. A number of negotiators feel that it is more efficient to “go straight to the detailed documents” whereas others believe you should always start with a Letter of Intent (LOI) or a Memorandum of Understanding (MOU) which sets out the key deal terms.

Sometimes time constraints mean that the parties must go straight to legally binding documents.

However, in most cases, there is a real benefit in using an LOI or MOU to ensure that parties are on the same page before focusing on the minutiae of the transaction. This is especially true for complex transactions with a number of critical items. If you cannot agree the key terms before moving to due diligence and detailed transaction documents, then that is a signal that the parties may have different or incompatible expectations about the deal.

Even when there are time constraints there can be real advantages in ensuring that the parties are “on the same page” by producing a very simple LOI or MOU.

Preparing an LOI or MOU can be used as a benchmark to help determine whether the parties have consistent objectives and committing the high level terms to paper will help force discussion or negotiation of critical items at an early stage. For example, if there is a critical point for one party and it is not sure of the other party’s position, setting it out in an LOI or MOU will help to highlight the point and extract an understanding of the other party’s position. Once it is agreed, the LOI or MOU can also then be used by the lawyers to draft balanced detailed documents that at least reflect what has been agreed by the principals at a high level and save considerable time in negotiations. On the other hand, going straight to the documents will likely result in a first draft that is one sided and will require significant negotiation and redrafting in order to reflect the final outcome.

One point of warning on LOIs and MOUs: Do not use them as a substitute for the detailed documents. LOIs and MOU should reflect the key commercial points only and should be at a high level. They should also be completed quickly. If they cannot be, then you should query whether the parties have consistent objectives.

If you are going to use an LOI or MOU then you should ensure that both parties understand and agree that the purpose of the document is to deal with key issues only. I have seen parties bogged down for weeks on minor issues in LOIs, including items such as notices provisions (!) and detailed mechanics about how reasonably standard mechanical items will be dealt with. This is generally a waste of time and resources. Parties sometimes need to be firm so as to ensure that the LOI or MOU only addresses the key points – that is their purpose. There will be plenty of time to discuss and delve into the detail when it comes to the long form documents. There is no need to deal with a number of these items twice.“

4  Choose your location and timetable wisely

This is oftentimes overlooked. Who really cares where you meet to negotiate as long as you meet?

Where you meet can be a positive influence on the outcome of your negotiations, and conversely the wrong choice of location can make your job harder. You should choose a location that will enable both parties to work easily, both together (during negotiations) and separately (on either side of the formal meetings).

There are a number of factors to consider: How many people do you need to accommodate and do you need a breakout room? Will the right people be able to attend your negotiations, and at the right times? Will the parties need to spend time in discussions with head office, or will they need to be working on board papers or other internal documents in order to progress the deal? What resources will be required? How difficult is it for the parties to get to the location and
has sufficient time been allowed between scheduled arrival and departure times? Will the location mean that one party is likely to be distracted with “business as usual” matters during the course of negotiations? Is jet lag likely to adversely affect one party? Are you expecting drafts to be turned overnight – in which case be realistic about how long this will take and who will need to be consulted – and allow time to actually read them!

5  Don't start until you are ready

This comes back to the premise that you need to have time to prepare. A favorite stonewalling tactic of some legal teams is to wait until late on a Friday to provide their comments on the documents, so that you and your deal team are forced to work all weekend when it may be difficult to get the necessary inputs from senior management or conduct the necessary analysis. Another favourite technique is to send back documents around midnight, which everyone knows need to be digested, understood and discussed before negotiations commence at 9am the next day.

Don’t allow yourself to be bullied into having to commence negotiations simply because that was the agreed date at the outset. Don’t allow the other side to force you to review the documents in an unrealistic timeframe or allow them to push you into starting negotiations before you are ready to do so, if you need more time to prepare, insist on it. Be considerate of the requirements of the other party as well, it is not necessarily an advantage to be sitting opposite an unprepared team. It’s generally more of a time wasting, costly exercise for everyone involved and you will often find yourself negotiating unnecessary points because they are not properly understood by one of the parties.

Of course, you should be doing everything in your power to ensure that you are prepared in time to keep to the agreed timetable, however if that is not possible then remember that there is little to be gained, and much to be lost, from commencing negotiations before you are prepared.

6  Read the documents!

Surely no one would come to a complex negotiation without reading the documents? In reality this happens more often than it should. I’m not sure whether it is because the other side is inexperienced, or they don’t realize the importance of actually reading the documents beforehand (perhaps they assumed they’d be doing a page-turn during the negotiation) and could work it out as they go along!). Maybe people get busy and caught up on other things. Given the negotiations are often worth many hundreds of millions or billions to the company, it borders on criminal that the negotiation team and even worse, their lawyers, would not bother to read the documents prior to meeting for negotiation.

I’ve been to negotiations where the other side’s negotiation team had clearly not had a pre-negotiation discussion and, on more than one occasion, had not even read the documents. On one occasion, we had to suspend negotiations for two days in order to allow the other side to regroup and take the time needed to read the documents and prepare their position. Some would ask why we did this, as surely we had the upper hand? Simply put, sitting across the table from a team who have no idea what the documents say and no real idea of their position, is a waste of everyone’s time. It would have been a torturous exercise to proceed with negotiations in this instance – for everyone – and any “outcome” would likely need to be revisited once the other side had properly considered the detail.

7  Consider the best way to negotiate the detailed transaction documents

Once you have agreed the key terms then it is important to circulate detailed transaction documents as soon as possible. This will provide an opportunity for the parties to focus on the details, identify any differences and progress quickly. Depending on the reaction of the other party, this should then result in either a list of key issues of significant difference or a mark-up of the document as soon as possible. Preferably, this should occur before a detailed negotiation meeting.

You should not decide which of the two approaches to take without careful consideration. For example, if there are material differences in relation to detailed provisions then it may not be productive for the recipient of the first draft to simply mark it up extensively and send it back. This could result in the parties simply stating two extreme positions and is unlikely to assist in moving towards a middle ground. It may be more helpful to identify the issues and then have a discussion to try to understand each parties’ concerns and requirements so that a solution can be found.

There are generally two approaches to a detailed negotiation meeting: Turn each page of the document and discuss any issues on each page in chronological order (the “page turn”); or have a list of issues that need to be discussed and walk through those issues.

I’ve been to negotiations where both approaches have been employed.

Sometimes a page turn is unavoidable – particularly towards the end of the negotiation phase, when you are seeking to confirm that there are no outstanding issues and that you have a document that is acceptable and able to be signed by both parties.

Mostly however, my experience has been that the more seasoned the advisors and the clients then the less likely it is that they will request a page turn – especially early on in the discussions. Page turns can also get stuck on a point – one memorable negotiation I attended succeeded in only reaching the end of page one after a full day of negotiations. When you’re sitting in front of a 100 page document, it can be a very inefficient (and therefore expensive) way to negotiate. My preference is invariably to approach the negotiation table with our team’s list of concerns, items of must-haves, nice-to-haves and items the team is happy to let go. I find that if all teams have prepared and have experienced negotiators, you can achieve much more in less time, using this approach.

However if you find yourself up against an inexperienced team, they may request a page turn so that they feel they are covering off everything, and can report back to their management or board, comfortable that they have done so. If this is the case then you need to be willing (and ready) to accommodate that approach.

8  Be clear about your outcomes and document these as soon as possible

As you agree points, ensure these are documented. This is where your legal team can really help. It is imperative to ensure that at the end of any round of negotiation there is a clear agreement between the parties on what has been agreed and what remains outstanding. It can be frustrating to run through this at the end of a long negotiation meeting where everyone is tired and wants to leave, but it is extremely helpful to set aside time at the end of each meeting to run
through these items – it will help prevent agreed items being re-opened and will make it clear to each party what points they need to consider and address prior to the next meeting.

9  Understand all parties' processes and requirements and be realistic about timeframes

It is important to understand what is required in order for the parties to finalise the deal and what is required to get there. For example, is Board approval required and what is the process and timetable for such approval – what internal documents will need to be prepared, at what stage in the negotiation can those be prepared and when are the relevant internal meetings?

You should also consider what government approvals may be required – especially when dealing with companies that have an element of government ownership, which is frequently the case in Asia.

If one party requires several weeks from when the deal is “struck” to when they can sign the transaction documents, then factor that into your timetable – especially if the deal is time critical.

If you are dealing with listed companies, then what are their obligations around public announcements – and how do they fit with your obligations? When parties are listed on different stock exchanges, this can lead to tricky timing issues about when the transaction can be finalised. I have seen transactions where stock exchange rules that apply to one party required immediate disclosure of the transaction, but the rules of the exchange that applied to the other party prohibited disclosure until a “disclosure window” the next day. This can create a situation where one side is free to speak to the media (and its shareholders) about what a great deal they have done, but the other is prevented from informing the media (and its shareholders) about why the deal is also good for it. This is not a great outcome and is one that can negatively and unnecessarily affect share prices. This can be avoided with a little planning and a proper understanding of the requirements that will apply to all parties. But you should try to understand these issues and their impact from the outset.

10  Always be prepared to say "no" and be willing to walk away

When all is said and done, if the negotiations are stalled and the deal doesn’t seem like it will be right for you and your company, be prepared to walk away.

This is sometimes hard for people to do – in many cases, the individuals concerned have worked full time on this matter for a year or more. They’ve given up a lot of their personal time to push through a landmark deal for the firm which was expected to change the strategic direction of the company, open up new markets, create a mega-company on the back of a merger or even all of the above. Oftentimes a great deal of money has already been spent before reaching the point of
negotiations. These are generally not deals that companies go into lightly – they are more often than not high level strategic market plays – I like to call them “bet the farm” deals.

Again, use your impartial advisors here. Ask them what they think.

They can often step back and see the deal from both sides and compare the potential result to other deals in which they have been involved. While they can advise you that they don’t believe the deal will be right for your company in its current form, only the company can decide to pull the plug on negotiations and walk away from the deal. A bad deal which you walk away from, while disappointing for everyone, is still a better result than a bad deal signed.

A successful negotiation outcome can have a material and immediate impact on your company’s bottom line.

Carefully preparing for negotiations places you, your negotiation team and your company in the best possible position to ensure a successful outcome from the negotiation. You and your team need to ensure you have considered your best case position, have considered the outcomes the other party most likely wants to achieve, that you have right people in your negotiation team (including advisors), and that you approach the negotiations with considered reason ensuring you address the core concerns of the other side. If you prepare for success, you are more likely to achieve the best possible outcome for you and your business.

Good luck and happy negotiating!