Saturday, December 24, 2005

Holiday Time - M&A Time

I'm enjoying my first Christmas in at least 4 years in which I'm not neck deep in a deal. To judge by the spate of recently-announced transactions, I'm in the minority this year.

I spent nearly all of December 2001 in New York, working on a deal that we walked from abruptly as wireless valuations cratered rapidly in early January 2002. The following December saw a similar scene, only this time a much bigger deal that never made it out of Seattle before having the plug pulled. So much of this work is spent on things that never come to fruition . . .

December 2003 marked the beginning of the process of selling AT&T Wireless. I remember having a particularly acrimonious call with my counterpart at one of the bidders a day or two before Christmas, and then taking out some frustration by felling several trees that had been damaged in an ice storm the night before (the short-handled axe is an underappreciated tool). By last December, I was living a different kind of frustration, dealing with Cingular and its parents as we tried to divest several hundred million dollars of assets to comply with the DOJ's consent decree on the merger.

What is it about the holidays that brings out such a frenzy of deal-making? Does the winter's waning daylight, forcing us indoors, cause the kind of corporate conjugation New Yorkers would associate with blackouts? Or is it just the draw of doing holiday shopping in Midtown Manhattan?

Monday, December 19, 2005

Google - AOL

Google's much-hyped investment in AOL illustrates the value of keeping deals as simple as possible. There can be a great deal of pressure, particularly in large organizations, to structure deals in a way that mitigates the most risk and pleases the most constituencies. That's fine in some cases, but not in a competitive bidding situation, and particularly not in a case like this, where the stakes were so high for Microsoft's opponent. Google NEEDED to keep AOL close, and Microsoft should have pulled out the stops to prevent this from happening.

Sure, valuation had a lot to do with it, but AOL certainly could have gotten the same price from Microsoft. However, while Google's deal is a straightforward minority investment with some ancillary commercial deals, Microsoft apparently insisted on structuring its investment as a joint venture.

If you're AOL, would you rather deal with an investor or a JV partner (with all the attendant minority rights, exit and management issues)? Couple that with Google's greater willingness to push the envelope on promoting AOL's ads, and this was probably an easy decision for AOL even if the parties were even on valuation.

Thursday, December 15, 2005

More J&J - Guidant

Good in-depth article via Wharton on use of MAC clauses. It will be amusing to watch this one play out now that Boston Scientific has lobbed a bid in near J&J's original price. Does J&J really believe Guidant's issues cripple it as an asset, or did J&J seize an opportunity to try and get a better price?

The article also alludes to the complicated decision-making process a seller has to go through in evaluating multiple offers. Price is important, but not everything. In a stock deal, the seller has to decide which buyer will do better integrating and realizing the synergies of the deal, thus creating more shareholder value in the new company. Guidant will also obviously be concerned about certainty of getting to closing at the agreed-upon price, given their experience with J&J (my guess is that a Guidant - BSX deal will have a VERY specific MAC clause). In other situations, sellers have to be concerned about closing happening at all. Foreign buyers, companies with activist shareholders, and large buyers who by the merger create industry concentration all may find themselves needing to offer a premium price to win the deal.

Thursday, December 01, 2005

Negotiation - Listening

I am modestly surprised at how consistently I still run across people in love with the sound of their own voice, who don’t pay enough attention to what others in the room are saying. For me, I’d guess that in a typical two-person business negotiation I do no more than 30-35% of the talking. I really prefer to listen, ask follow-up questions and keep the other side talking. I find this tremendously helpful in what I do, yet I still feel like listening is underappreciated as a negotiating tool.

I find two primary benefits to listening during a negotiation, but they can require different ways to focus the listening. The first is the easy one – listening to the other side’s point of view allows you to craft more creative solutions to their business problem that also work for you (the cliché “win-win” outcome), or more articulate and forceful arguments about why their positions are wrong or won’t work. Understanding what is really driving the people on the other side of the table is tremendously helpful. I don't mean understanding their negotiating positions - those are always right out in the open. I'm talking about the reasons why they are taking those positions, which often can only be gotten to via active listening and follow-up questions. Perhaps the other side has already received BOD approval to do the deal at a certain price, but will need to go back through the approval process to change the terms. Maybe the CEO got burned investing in his brother-in-law’s car dealership 20 years ago, and now the company insists on overreaching apportionment of liability. There's no end to the factors that can drive the positions we take in negotiation, but by actively listening (not just nodding your head robotically while mentally rehearsing your witty rejoinder) and asking probing questions, you can ferret these issues out and work on the solution to the real problem at hand.

The second benefit to listening, which can be harder to focus on because it seems inefficient, is what I call the “day in court” phenomenon. Some negotiators just need to be heard. It can be their egos, a need to be able to return to their senior management and truthfully report that they explained all of their positions to a receptive audience (an audience which still, incidentally, said “no”), or just a need to vent. But it can be hard to fight the urge to cut someone off. You’ll find yourself in a negotiation, and you know precisely what the other guy is going to say. You’re a smart fellow with lots of good uses for his time, so you cut in mid-sentence and say “no.” No question there are times, particularly in lengthy M&A negotiations, when you need to do this. But if it is your primary style you will come across as insufferably arrogant. That doesn’t make it easy to do business. Unless the other side has no leverage whatsover (and sometimes even then), bullying only makes them dig in. On important issues – even when I know without a doubt that I am going to reject the argument that is being spun to me – I will hear the person out, and perhaps even ask a follow-up question or two. It shows respect and indicates a consideration of the opposing point of view. The person I'm negotiating with can then accede to my point without feeling like they are knuckling under - and believe me, considerations of ego and face-saving are alive and well in American business negotiations. Furthermore, I have consistently found that opponents will treat my positions with greater deference if they feel I have fully considered theirs in reaching my conclusion.