Protegrity Advisors recently published a Long Island M&A Report, highlighting the strong M&A activity on Long Island, even as the country navigates what might be best described as a modest economic recovery. The full report can be read here.
As the report dives into the statistics and metrics, it’s important to remember the very foundation of these transactions – negotiations. The world of M&A is all about negotiations and there’s a lot to me learned from these sometimes complex business transactions.
Published previously in the Harvard Law School Program on Negotiation Daily Blog on September 19, 2011, is an article entitled “Negotiation lessons from the M&A World.” The full article can be read here.
For many years, Harvard Business School professors James Sebenius and Guhan Subramanian have studied real-world mergers-and-acquisitions (M&A) deals, which tend to involve experienced lawyers, bankers, and businesspeople, and many millions, even billions, of dollars. Some of these deals prove successful; others are well-known disasters.
Sebenius and Subramanian have begun to apply their observations about these agreements to other multiparty contexts. One lesson you may be able to adapt to the complex negotiations that crop up in your business and personal life is deal protection, or the extent to which the parties are bound to each other between signing and closing a deal. A heavily negotiated issue in M&A transactions, deal protection is rarely negotiated outside the M&A context, say Sebenius and Subramanian, even when it could create significant value.
Take the typical residential real-estate deal. In the time between the purchase-and-sale agreement and the closing, the seller is bound irrevocably to the transaction. This clause protects the buyer, but it means that the seller can’t accept a higher offer—a condition that can be inefficient for both the seller and the buyer.
Imagine you’re selling your home. A prospective buyer falls in love with your house and (unbeknown to you) one other house. After much debate, he makes a successful bid on your house.
Soon after you’re under contract, you receive a blockbuster offer from another party. It’s too late to back out, right? Not if you had negotiated deal protection. For example, you might have proposed a clause that would allow you to withdraw between signing and closing by paying the buyer a breakup fee of perhaps $25,000. For a buyer who is virtually indifferent between your house and another house, this should be an attractive alternative.
Buyers can make similar moves. Suppose parties are at an impasse, with the seller asking $500,000 and the buyer offering $450,000. The buyer might offer a “loose” $450,000 deal that allows the seller to accept a better offer between signing and closing by paying a modest breakup fee, such as the buyer’s out-of-pocket costs.
Sophisticated deal structures create value by capitalizing on differing beliefs about the likelihood of higher offers. Such terms could be useful in home-buying transactions, where the stakes can feel just as high to the players involved as if they were hammering out a billion-dollar merger.