When competing with multiple parties to secure a coveted resource, such as your dream house, a cool invention, or a talented new hire, it can be hard to stand out from the pack. Amazon faced that challenge in its $13.4 billion acquisition of upscale grocer Whole Foods in 2017, as reported by Alex Morrell for Business Insider. The Amazon–Whole Foods negotiation demonstrates the value of commitment in negotiation—but also illustrates the downside of moving quickly.
Food Fight
For years, Whole Foods faced pressure to prop up its slumping stock price and reverse declining profits. In April 2017, activist hedge fund Jana Partners revealed it had acquired a nearly 9% stake in the grocer and was seeking to shake up upper management, the Wall Street Journal reports.
Unwilling to surrender control, Whole Foods CEO John Mackey and his team hired the advisory firm Evercore to fend off the hostile investors and help chart a path forward. The same week, Bloomberg reported that Amazon had been considering a bid for Whole Foods but had let it drop. Curiosity piqued, Whole Foods had an outside consultant reach out to Amazon, which agreed within a few days to meet to discuss a merger.
In a meeting with Whole Foods, Jana Partners demanded an overhaul of the grocer’s board of directors, among other changes. On Friday, April 28, the Whole Foods board met to contemplate its response.
That weekend, Whole Foods leaders flew to Seattle for a meeting with Amazon that Mackey later characterized as “love at first sight.” But the Amazon–Whole Foods negotiation was only in the preliminary stages, and pressure from Jana Partners was mounting. Whole Foods engaged in talks with a competitor—supermarket chain Albertsons, according to Reuters—regarding a potential “merger of equals” and with another competitor regarding a commercial supply-chain deal but not a merger.
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Pairing Off
On May 23, Amazon submitted a written offer to purchase Whole Foods for $41 per share, 17% above the grocer’s $35 per share trading price. But Amazon, represented by Goldman Sachs, was adamant about two conditions: utmost secrecy and exclusive negotiation rights. If word of the talks got out or if Whole Foods wanted to auction itself off to the highest bidder, Amazon said it would bow out.
Mackey characterized the meeting at Amazon headquarters as “love at first sight.”
On May 30, Whole Foods’ board met to discuss its options, which included potential deals with Amazon, competing grocers, and private-equity firms. With Evercore advising that Amazon would likely offer the best price, Whole Foods decided to focus on doing a deal with the online retailer.
Whole Foods made a counteroffer of $45 per share, or almost $14.4 billion. Amazon countered at $42 per share, declaring that its best and final offer. Once again, Amazon warned Whole Foods not to approach other potential bidders and said it was prepared to close the deal quickly, according to later Securities and Exchange Commission filings.
Whole Foods snapped up the offer and on June 15, went public with the merger. Shares of Whole Foods temporarily surged as investors hoped for a bidding war, but no offers materialized.
The outcome of the Amazon – Whole Foods negotiation marked “a major escalation” in the online merchant’s battle with Walmart for bigger slices of the $800 billion that Americans spend annually on groceries, according to the New York Times.
Lessons from the Amazon–Whole Foods Negotiation
Amazon successfully shut down its competition by making exclusivity a condition of its negotiations with Whole Foods. In his book Dealmaking: The New Strategy of Negotiauctions (Norton, 2020), Harvard Business School and Harvard Law School professor Guhan Subramanian notes that such shut-down moves can succeed at prematurely cutting off the competition in an auction or negotiation-auction hybrid.
To carry out such advanced negotiation techniques, you need to give your target an incentive to deal with you exclusively. This might mean making an eye-catching offer that your competitors can’t match. If you bring unique value to the deal, such as a reputation for prestige or opportunities to reach new customers, all the better.
Moreover, accompany your shut-down move with a credible threat to walk away if the target refuses to agree to an exclusivity period—and then be prepared to do so. Finally, note that shut-down moves are particularly likely to be effective when your target is under pressure to reach an agreement in a hurry, as Whole Foods was.
But there’s often a downside to an exclusive negotiation that closes quickly: Negotiators don’t have time to build rapport and discuss intangible issues, such as culture. Indeed, a year after the Amazon–Whole Foods negotiation, many Whole Foods employees were unhappy with changes Amazon imposed, including strict new inventory-management procedures. There appeared to be a culture clash between Amazon’s “tight” corporate culture and Whole Foods’ “loose” one, write University of Maryland professor Michele Gelfand and her colleagues in the Harvard Business Review. “In addition to negotiating price and other financial terms, organizations discussing a merger need to negotiate culture,” they conclude.
In retrospect, Mackey’s “love at first sight” comment about the Amazon–Whole Foods negotiation seems naive and premature. When a potential business partner wants an exclusive courtship, remember that there are often benefits to taking things slowly.
What other takeaways have you absorbed from the Amazon – Whole Foods negotiation?
