• Use anchoring and your understanding of the zone of possible agreement (ZOPA) to decide when to make a first offer during a negotiation.
• Auction, when you have a large number of potential buyers, the asset for sale is well specified, or speed and pro...

• Negotiauctions is a dealmaking situation in which competitive pressure is coming from both across-the-table competition and same-side-of-the-table competition.
• Negotiauctions are common in complex dealmaking situations.
• The difference between a negotiation, auction, and negot...

• Several (but not too many) potential buyers. Usually between three and ten.
• Asymmetric information. The seller typically knows more about the structure of the situation than the buyers.
• Ambiguity around traditional process setter and process taker roles. The process itself is...

• Anchoring works by influencing your perceptions of where the zone of possible agreement (ZOPA) lies.
• Anchoring is a reason for making the first offer, because you can potentially influence the other party.
• But it only works when the other side is uncertain about where the ZOP...

Anchoring too aggressively. If you make a first offer way outside of the ZOPA, you may have to make large concessions to reach a deal or walk away even though a zone of possible agreement exists.

Anchoring too conservatively. You unknowingly give away a big...

• Consider making the first offer when you have a pretty good sense of where the ZOPA is in order to anchor the negotiation in your favour.
• If you don’t know the ZOPA, hang back and let the other side make the first offer, or make a soft anchor, e.g. “We’re thinking about something in ...

Differences in expectations about the future often create value in negotiations.

Contingency contracts have three major benefits:

• They align incentives.
• They allow the parties to diagnose the honesty of the other side.
• They enable the parties to share the risk.

An auction is a mechanism in which the seller is a passive participant after the process has been set, and the primary source of competitive pressure arises from competition among buyers.

Negotiation is a mechanism in which the primary source of competitive...

Consider the following:

• The number of bidders.
• Certainty about who the bidders are.
• Buyers’ incentives to participate.
• Distribution of valuations.

• All else equal, the more you are able to specify what you want, the more likely it is that an auction will be a better option than a negotiation.
• Buying commodities is a good example of an appropriate thing to auction.
• Even clearly defined services can be auctioned like commo...

• Auctions boil everything down to price.
• Negotiations open things up for value-creation.
• If there is a possibility for win-win moves, it is better to negotiate with one or more potential counterparties than to hold an auction.

• Negotiations are best when relationships, service, and/or deal execution are important aspects of what is being bought or sold.
• Negotiations leave room for a more favourable resolution of potential problems down the road.
• Auctions signal that the buyer is indifferent among su...

• Auctions are a much faster process than negotiations.
• If there is a specific window of opportunity to sell, or the asset is deteriorating as time passes, auctions are preferable.
• Auctions are faster and riskier. They sometimes “bust,” in which nobody shows up; or, even worse,...

• Broad-based processes like auctions are difficult to keep secret.
• Negotiations are much more private.
• A frequent concern during M&A deals is to broaden the search process in the sale of a company for fear that the employees will find out, start looking for new jobs, and the v...

Open outcry auction: Bidders know the high bid at all times, and have the option of beating it.

Sealed bid auction: Bidders submit written bids and do not know what others bid, or (often) how many bidders there are before the winner is revealed.

There...

• The minimum number of initial bidders in an open-outcry auction is five or six
• Less than five bidders and better to conduct a sealed auction where a lack of transparency means bidders may bid against themselves.
• A sealed bid auction can create the perception of competition ev...

Winner’s curse: The feeling that you overpaid simply because you were the highest bidder.

• Reflect on all the costs and benefits of winning or losing the auction in calculating your reservation value.
• Costs often include much more than price. Could be your reputation, or competi...

• The key is to bid high enough to win, but low enough that you preserve as much profit as possible from the deal.
• Determine how your chances of winning increase with your bid.
• Choose the bid that maximizes your expected profit = Probability x Profit

• Continue bidding up to your full reservation value.
• Whenever common value plays a role, bidders should rationally “update” their reservation value during the course of the bidding. E.g. the layman bidder taking cues from an expert with insider knowledge.

Three factors fue...