David WanetickManaging Director IncreMental Advantage

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IncreMental Advantage.

You can get much further

with a kind word and a gun

than you can with a kind than you can with a kind

word alone.

- AL CAPONE

� Election of 1912� Lessons to be learned▪ Importance of anchoring the negotiations

▪ Understand what the other side wants

▪ The answer is not always compromise▪ The answer is not always compromise

▪ You don’t have to show all of your cards

▪ You can’t lie, but you don’t have to tell the complete truth

▪ Use time to pressure the other side

▪ You don’t always have to meet with the other side

� Costs of Negotiation� Time

� Information leakage

� Lack of focus at your businessLack of focus at your business

� Concern among employees

� You may be used to enable the other side to gain leverage

� Delay

� Competitors may use delay to damage your business

� Risk being seduced

� Background� Job function� Experience� Personality� Time availability� Time availability� Detect hidden agendas� Confidence

� Team size – manage with caucuses

� Map your way to the decision makers

� Internal champions

� Sequencing with multiple negotiating parties

� Create a scoring system� Create a scoring system

� Set demands as a condition for beginning the negotiations

� Have an audience

� Due diligence – align your proposal with their objectives

� It is better to leak than divulge information

� Other side must feel your pain – The Ultimate Game

Stake-

holder

Pain Prefer-

ence

Power Role in

Decision

� Realize that negotiations take place anytime your try to influence your target

� Publish, promote, spread rumors before you begin to negotiate

▪ Soon after USAir’s revelation that it was for sale, Robert Crandall, CEO of American Airlines, wrote an open letter to American’s 118,000 employees which stated:

▪ …the best way for American to increase its size and reach is by internal growth…not consolidation…So we will not be the first to make a bid for USAir…

▪ American was signaling to United not start a bidding war over USAir

� Don’t look for a fair fight, you must have a compelling

advantage

� Trump Tower

Paint a vision of value� Paint a vision of value

� Fred Smith of Federal Express

� Ronald Reagan

� Let counterparty make independent discovery

� Start your negotiations with a preplanned exit strategy

� Otherwise there will be irrational escalation

� Due Diligence� Know your opponent’s interests▪ Give your opponents dilemmas not problems▪ Make multiple, similar offers

� Decision rights� Decision rights

� Know your opponent’s negotiating style

� Opponent’s tactics and ploys; time and effort

� Opponent’s bargaining strength

� Importance of a favorable outcome to your opponent

� Opponent’s status

� Opponent’s financial situation

� Type and size of your opponent’s competitors

� Due Diligence – Questions to Ask

� What do you need to achieve?

� What does your opponent need to achieve?

� What are the key issues for your opponent?

▪ Their demands provide insight

� What kind of long-term relationship does your opponent want?

� What are the barriers to reaching a mutually beneficial agreement?

� Pressure you will be put under is a function of:

� How long opponent has been with his company?

� How much experience they have?

� How successful they have been over the course of

their employment?

� How familiar they are with your area?

� Never underestimate your competitors

The agenda should comprise the following:

� Who will attend� The duration of the meeting� Who will initiate the proceedings� Issues to be discussed� Issues to be discussed� Order in which topics will be discussed ?� Time allowed for each topic� Issues that should not be part of the negotiation

� Bring agreements that you create

� Keep track of the issues and how they get resolved

� Pros� Tactical flexibility

� Stalking horse – obtaining information / conveying information

� More ideas for reconciliation / impasses

� Expertise

� Detachment

Cons� Cons� Expense

▪ Retaining

▪ Compensating

� Communication

� Loyalties

� Use� Draft a sympathetic figure to negotiate on your behalf

▪ Someone who tries to stop a train by tying himself to the railroad tracks may get less sympathy than someone else who has been tied there against his will.

� Opening offer

� High statistical correlation between opening offer and closing price

� Don’t negotiate against yourself� Might get what you ask for� Must appear to be reasonable� Must appear to be reasonable� Allows other side to save face� End objectives – signature vs. relationship

� When you know more about the industry, similar deals, you should make the opening offer and visa versa

� The Beatles’ A Hard Days Night (7.5% v. 25%) � Thomas Edison and his ticker tape machine

� Begin the negotiations with common interests, not sources of contention

� Responding to opening offer

� Responding to absurd offers� Responding to absurd offers

� Non-Offer Offers

� Develop and strengthen your walk-away points

� Sequencing of contentious issues

� Concessions management� Monetary vs. non-monetary� Reactive devaluation - Don’t give unless asked� Must be a corresponding concession from the other site� Diminishing concessions� The Machiavelli Principle� The Machiavelli Principle� Use the word “because” when seeking a negotiation

� Crunch strategy

� Agree to whole package

� Nibble near the close� Check against sloppiness – Tiger Woods, dopamine � Real money is at stake� Increases satisfaction of the other side� Sets tone for renegotiation

GENTLE CRUNCHES

� We need your help on this.� That doesn’t work for us.� What can we do on this?� I was looking for a better

number.

MODERATE CRUNCHES

� There’s no way we can accept that.

� I don’t think you understand.� I just couldn’t bring that back

to my boss. number.� I’d like you to rethink your

numbers and get back to us.� That really isn’t what I

expected.� You know our situation.� Let’s put our heads together

on this.� There must be something we

can do.

to my boss. � I don’t think we’re

communicating.� Perhaps we have a

misunderstanding here.� I just can’t get there..� Help me out, here. � We can’t live with that.� What kind of a deal can you

give me on this?

AGGRESSIVE CRUNCHES

� Yeah. Right.� Do you want my business, or

what?� How can you say that with a

straight face?

AGGRESSIVE CRUNCHES

� Are you sure about your math?

� Are we talking about the same thing?

� The decimal point must be in straight face?� We’re not a charitable

organization.� Charity begins at home, and

I’m at work.� Friendship only goes so far.� I thought you came here to

negotiate.� You’re not even close.

� The decimal point must be in the wrong place.

� At that price, we can’t even talk.

� You can’t be serious.� All kidding aside…� That’s way out of my budget.� Be serious.� Be realistic.� Does your calculator need a

new battery?

INFLAMMATORY CRUNCHES

� Come back when you’re serious.

� Try again.� You’re insulting my

intelligence.

NONVERBAL CRUNCHES

� Feigned heart attack or pulling knife out of chest

� Silence� Not responding to their letterintelligence.

� You need a rendezvous with reality.

� You call that an offer?� What part of “no” don’t you

understand?� Would you send in the next

salesperson?� If I gave you my whole firm,

how much would I still owe you?

� Not responding to their letter� A long caucus� Laughter� Shaking head

ENSUING CRUNCHES

� That’s a step in the right direction.

� We’re making progress.� We appreciate that. What more

can we do?

RESPONSES TO CRUNCHES

� Make me an offer.� What are you looking for?� If you were in my shoes, what

would you do?Where do we need to be?can we do?

� You’re getting warmer.� That’s still not real attractive to

us.� That’s a start.

� Where do we need to be?� Give me some guidance here.� What do you need?� Do you have a figure in mind?� What would it take?� What could you live with?� What were you thing about?� What is it worth to you?

� Good cop / bad cop

� Exploding offers

� Limited authority� Limited authority

� Power of precedent

� Disproportionate power

� Threats

� Bullying

� Make them smaller and weaker

� Laws, regulations, policies, codes of conduct, organizational charters or constitutions. Other important standards involve established practices, precedents, expert opinions, market values, principles, policy papers or logic.▪ Reagan v. Gorbachev – Trust but Verify▪ Reagan v. Gorbachev – Trust but Verify

� Remove valuable players from their team▪ Conflict out▪ Run out the clock

� Compare your proposition with their top executives compensation

� Giant’s allies can be coercers – Malta, Britain, NATO

� Enemies of Giants – Information Compulsion

� Consideration of outcomes� Probability of successful integration

▪ Include the other side in drafting proposals or contracts

� Focus on common issues

� Ranges versus fixed points

� Issues planning versus sequence planning

� Frequency of counterproposals

� Defense / attack spirals� Attack the problem not the person

� Labeling behavior

� Testing understanding and summarizing

� Ask questions

� Feelings commentary

� Avoid argument dilution

� Post negotiation review

� Make the other side dependent on you by educating them

� Use surprise

� Don’t assume that the other side represents one unified

voice

� Try to fractionalize the other side

▪ How are advisors compensated, what do each of the other employees really wantemployees really want

� “If you can’t convince, confuse.”

- President Harry S. Truman

� Try to delegitimize the other side or the entire issue

� US - German Reparations Tribunal after WWI

� Plant seeds of greed in your opponents mind

� Other side must feel your pain – Ultimate Game

� Partisan perceptions become self-fulfilling prophesies� Partisan perceptions become self-fulfilling prophesies

� Must make the other side understand that they can

cherry-pick the best features from the other side

� Benefits of using e-mail include:

� Convenience when parties are at a distance

� Time to consider one’s next move

▪ E-mail gives the slower party a chance to think of and articulate more skillful responses between messages.articulate more skillful responses between messages.

� A clear record of the proposals

� Ease in conveying large amounts of data to back up proposals

� Eliminate the chance that our side would get away with some clever bargaining move in the context of a face-to-face meeting or telephone conversation

� Leveling of the playing field between negotiators with different levels of seniority and experience

� The power to quickly mobilize large coalitions of like-minded people using group e-mail lists

� The most productive arguments use the future tense

� Anticipate your audience’s objections and address them

before your opponent does

� Oversympathizing makes someone’s mood seem

ridiculous without actually ridiculing it

� It is good to portray the enemy as belittling your cause

� By giving advance warning of an emotion, you inoculate

your audience from it

� To shift people’s point of view, start from their position,

not yoursnot yours

� Start from a specific point to a generalization, not the

reverse

� The last speakers have the persuasive advantage

� If the facts work in your favor, use them. If they don’t (or

you don’t know them), then…

� Redefine the terms instead. If that won’t work, accept

your opponent’s facts and terms but …your opponent’s facts and terms but …

� Argue that your opponent’s argument is less important

than it seems. And even if that isn’t to your advantage…

� Claim the discussion is irrelevant.

� Research the people you will meet – e.g. pictures on their websites

� 93% of interpersonal communication is non-verbal

Congruity of body language is important� Congruity of body language is important

� Behavior mirroring

� Eye-contact

� Glasses / watches / pens

� Factor in norming and outside conditions

� Can’t expect that everyone will be perfectly honest in negotiations

� You shouldn’t lie, but you don’t have to tell the complete truth

� You can “lie” by telling the truth� Soccer players announcing their intentions

� Appointing Pauli to convey messages

� There will be more lies through omission � Ask “What else should I know?” “What other questions should I

ask”

� Look prepared

� Signal your ability to obtain information

� Ask less threatening, indirect questions� Ask less threatening, indirect questions

� Gather information from multiple sources

� Set a trap

� Triangulate the truth

� Verbal Cues

� Infrequent use of “I”, “me”, “mine”

� Greater use of contractions� Greater use of contractions

� Use of shorter statements

� Greater use of extraneous information

� Try to buy time through repetition, ask questioner to

repeat the question

� Use of self-interruption and other attempts to change

direction of the discussion

� Other Cues

� Place objects between themselves and audience,

disconnect between emotions and expressionsdisconnect between emotions and expressions

� Higher blink rate

� Less eye contact, less wrinkles around the eyes, take

up less physical space

� Change subject to gauge reaction

� Use contingency contracts

� Concerns with contingency contracts:

▪ Contingency contracts are dangerous if the other party is more ▪ Contingency contracts are dangerous if the other party is more knowledgeable than you

▪ A rule of thumb: if you’re going to argue about who won the bet, it’s not worth betting in the first place

▪ Make sure your contingency contracts are incentive compatible. That is, the clause you negotiate should provide incentives for the other party to behave in ways that are compatible with the spirit of the your agreement

� Compliance

� Get other side involved in creating the agreement – rather than imposing the agreement on to them

� Get influences involved – they also help with compliance

� Memorialize the agreement with plaques, trophies, etc.

� Post-settlement settlements

� Postdeal renegotiations

� Intradeal renegotiations� Intradeal renegotiations

� Extradeal renegotiations

� Advantages� Good for bridging value gaps

� Good incentive tool

� Tax deferment on compensation

� Problems with financial incentives – other milestones –� Problems with financial incentives – other milestones –customer satisfaction, technology development, website visitors, customer acquisition – refer to negotiations book

� Sometimes acquirers are willing to pay high prices but earn-outs allow them to reduce expectations among other potential acquires

� Payments disbursed under earn-outs are not treated as

compensation expense, which is subtracted from

earnings. Instead, these payments appear as contingent

payments on the cash-flow statement and intangible

assets on the balance sheet, neither of which drive assets on the balance sheet, neither of which drive

investor sentiment as much as the earnings numbers on

the income statement.

� Concerns� Difficult to negotiate

� Calculation is very difficult – no one knows how to make the calculations

� Litigation often results

▪ Potential litigation is a bargaining tool for not doing earnouts

� The seller could take short-term measures to artificially stimulate sales. For example, the founder may sell a product that provides for free maintenance service for five years. This may stimulate sales but would mean a loss of revenues over the years from zero maintenance revenues.

� Can instill a have and have not mentality in the company – other executives may need to be compensated

� Company must be in a growth mode, not appropriate for

asset or turnaround plays

� Unknown events – what happens if the acquirer gets

purchasedpurchased

� Difficult to have earn-outs when there is leverage – the

lenders will want their money out first, so too will the

executives with earn-outs

David WanetickManaging DirectorManaging Director

IncreMental Advantage

dwanetick@incrementaladvantage.com