Negotiation and Business
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The definition of insanity is doing the same thing over and over again and expecting different results. (Albert Einstein)
We all negotiate.
Negotiation is everyday life is the first thing one might be told when attending a negotiations class. As cliché this may sound, by giving it a second thought we actually see the validity of such an assertion. We negotiate with ourselves on whether to eat an icecream or drink a beer or decide between a movie and a book. We negotiate with our parents to go to a concert, with a street vendor on the price of that divine pair of shoes. We negotiate with our lover about the destination of our holiday. We negotiate with our employer for a better salary. And at a metaphorical level, we negotiate with time when we try to fool it by developing time management techniques.
Indeed, negotiations invades a vaste portion of our daily existence and, although we do not always aknowledge, it does exert a great influence on our outcomes and our overall life quality. Failures lower our self-esteem and successes improve our self confidence and boost the positive image of the self.
However, despite the fact that there are some basic principles and theories about negotiations, reality prooved that no one approach is appropriate all of the time and for all conditions. This leads to the conclusion that a contingency view is the best way to define successful negotiations – while it is true that generic principles are useful, specific applications dependent upon the dinamics of the environments are needed.
Negotiation and business
Negotiation is particulary important in the business field where every action of a player affects the market as a whole. It is not rocket science to admit that every manager would act in the benefit of his company, trying to maximise the value he can get from a situation. But sometimes a managers action would be detrimental to other businesses or it might contradict othersopinions. Other times, ones decision needs the agreement of other parties that must be convinced to adhere to a certain course of action. All of these situations are subject to negotiations.
However, in the Wall Street arena the process of negotiation between parties is much more complex than in everyday life situations. This is because huge amounts of money are at stake. Moreover, usually managers are dealing with other peoplesmoney and must represent their interests in the best way possible, otherwise they will be discharged. These connections develop in conflicts of interest in which negotiations play a crucial role.
Campeau-Federated Merger
Mergers and acquisitions (M&A) are a primary means of firm growth. M&As strategies have been popular among U.S. firms for many years. Although the primary goal is to increase value, not all M&As achieve this result, but, on the contrary, they become sheer failures and sometimes they threaten the very existence of the companies involved.
A study by KMPG International looked at the shareholder returns on corporate mergers relative to the performance of other companies in the same industry one year after the announcement of the merger. Using this commonly cited standard of success, it found that 83% of mergers failed in providing higher value. While there are many reasons why M&As fail to unlock value, an analysis of these factors reveals that the major mistakes are related to negotiators behaviour. These include:
Hubris
Overoptimism
Information availability bias
Confirmatory bias
Escalation of comittment
Deal fever – individuals produce many deals because they are evaluated on the basis of the number of the deals done and not on the basis of their intrinsic value.
Another problem at work is the managers failure in conducting a rigurous due diligence. Due diligence is a process through which a potential acquirer evaluates a target firm for acquisition. In an effective due-diligence process, hundreds of items are examined in areas as diverse as the financing for the intended transaction, differences in cultures between the acquiring and target firm, tax consequences of the transaction, and actions that would be necessary to successfully meld the two workforces. The failure to complete an effective due diligence process may easily result in the acquiring firm paying an excessive premium for the target company.
In a recent survey, 250 global executives involved in M&As admitted that there were breakdowns in their due-diligence processes, and half of these individuals reported that this resulted in important issues not being detected.
In addition, firms sometimes allow themselves to enter a bidding war for a target, even though they realize that their current bids exceed the parameters identified through due diligence.
In the M&A activity precision is a must. Having a disciplined negotiation plan is straightforward. Despite this fact, deal-making cases are not always constructed on such premises. As the former US trade representative Charlene Barshefsky said, youd be surprised how many negotiatiors dont know what they want with the kind of precision that a negotiation demands. As a result, they end up with bad deals, as the following case shows.
Quick overview
Robert Campeau was a successful canadian investor in the early eighties, considered one of the Fortunes Fifty Most Interesting Business People. In 1987, he sought to aqcuire Bloomingdales, the glittery, New York-based store that has perfected the art of retailing as theater, as a New York Times writer describes it. Campeaus plans were to expand the business – doubling the number of stores by adding 16 to 18 new Bloomingdales over the next five years, including one or more in Canada; opening its first Chicago store (a project begun before Campeau bought Federated) and other stores in Minneapolis and Palm Beach, Fla. Basicly, Campeau wished to make Bloomingdales into a national brand.
Therefore, on 25 January 1988, he initiated a hostile takeover bid for Bloomingdales parent company, Federated Department Stores. A hostile takeover is a special type of acquisition wherein the target firm does not solicit the acquiring firms bid. The bid began with an offer of $47 per share. Unfortunately for Campeau, on February 29th, the Federated Board received another offers from Macys, a U.S. chain of mid-to-high range department stores in New York. The battle began with Campeau and Macys