No matter the size of your deal, there’s a lot that business negotiators can learn from the high-flying world of mergers and acquisitions (M&A). In particular, a shift in technology firms’ M&A negotiation strategy during the 2010s is worth revisiting for what it can tell us about the role of agents in negotiation.
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Beyond the Bankers
More than $100 billion in technology mergers and acquisitions were announced in the United States in 2014, a level not seen since 2000, according to financial software company Dealogic. Among the most notable acquisitions, Google paid $3.2 billion for thermostat and smoke alarm maker Nest Labs (now Google Nest), and Facebook shelled out $19 billion for instant-messaging service WhatsApp.
In addition to the number and size of the deals, the way they were conducted was notable. Rather than hiring a Wall Street investment bank to find and evaluate targets, and lead any negotiations that follow, many technology firms chose to rely on in-house corporate development teams to do this work, David Gelles reports in the New York Times.
The percentage of companies that negotiated acquisitions without an investment bank in deals exceeding $100 million leaped from 27% to 69% between 2004 and 2014, according to Dealogic. Apple, Facebook, and Google all made billion-dollar-plus deals without bankers. Beyond M&A negotiation strategy, the switch highlights the pros and cons of working without a negotiation agent.
The Rationale for Going It Alone
At least three factors inspired Silicon Valley executives to shun the services of investment banks as part of their M&A negotiation strategy:
1. Clashing objectives. The decision to conduct negotiations in-house may be rooted in the fundamentally different goals that Silicon Valley executives and bankers have for conducting acquisitions. Because bankers typically favor deals that will bolster the acquiring company’s earnings per share, they may lean toward pitching acquisitions of well-established companies. Indeed, Facebook’s vice president of corporate development, Amin Zoufonoun, told Gelles that bankers used to advise Facebook to buy up industry stalwarts such as Yelp and PayPal.
By contrast, Silicon Valley executives tend to be more interested in finding ways to adapt and innovate than in maximizing short-term earnings. As a result, they’re constantly on the hunt for start-ups. And many high-tech leaders believe they’re better positioned than bankers to identify them in Silicon Valley. These differences reflect the fact that principals and their agents often have diverging perspectives and incentives, as noted by principal-agent theory.
2. Relationships instead of transactions. Some high-tech executives focus on building relationships with potential targets before discussing the possibility of a transaction. Facebook CEO Mark Zuckerberg forged bonds with Instagram founder Kevin Systrom and WhatsApp co-founder Jan Koum before suggesting deal talks with them, for example.
By comparison, given that banks are paid for their services before deal implementation begins, they typically don’t have strong incentives to take a long-term perspective. “The most important thing is that soft stuff,” Facebook’s Zoufonoun said to Gelles, referring to culture and vision. “And that soft stuff is more challenging for a bank or an adviser to tap into.”
3. Efficiency and cost. Some technology firms have calculated that hiring their own full-time bankers is more efficient and economical than paying separately for each M&A negotiation, Gelles reports. Facebook, for example, hires Wall Street bankers to run deals from start to finish.
Keeping advisers on staff should theoretically give analysts stronger incentives to consider the firm’s long-term interests, as they can be held directly accountable for disappointing results. However, in-house advisers may feel pressured to support deals championed by their bosses.
Deciding When to Seek Help
What does M&A negotiation strategy tell us about when to hire an agent and when to go it alone? Here’s some guidance for your own negotiation process:
1. Beware overconfidence. When you lack expertise or connections in a particular dealmaking area, beware the tendency to be overconfident in your ability to get up to speed quickly. Lawyers, bankers, and other specialists take years to master the rules and laws relevant to their work.
2. Identify compatible strengths. Hiring an agent doesn’t have to be an all-or-nothing proposition. Even as they focus on finding targets and negotiating in-house, many tech companies continue to consult bankers for financing advice and fairness opinions (assessments of whether the deal terms are fair).
With this in mind, when meeting with potential agents, discuss what you each bring to the table. Which of you is better equipped to identify deal opportunities? Who should lead negotiations, and should you both be present? What special insight can the agent provide into a deal’s merits? A good agent will recognize your strengths and be willing to share duties.
3. Align your values. Before hiring an agent, take steps to align their incentives with your values. This might mean negotiating a long-term financial arrangement, such as withholding part of their fee (or offering a bonus) based on the agreement’s success after a year or two. You could also encourage your agent to take a long-range view by offering them a position in your organization, as many tech companies are doing. Finally, choose agents who have a reputation for executing deals that last.
What other useful negotiation advice have you absorbed from M&A negotiation strategy?
Claim your FREE copy: Business Negotiation Strategies: How to Negotiate Better Business Deals
Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.
