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All about negotiauctiong: The crossover between negotiation and auctioning.

Dealmaking

Dealmaking

by Guhan Subramanian

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Dealmaking: Key Takeaways

  • 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

  • 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...

Common Features of Negotiauctions

  • 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

  • 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...

Risks of Making the First Offer

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...

First Offer Guidelines

  • 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 ...

Value-Creating Moves

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.

When to Auction, When to Negotiate

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...

Factors To Consider: Profile of Potential Bidders

Consider the following:

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

Factors To Consider: Asset Characteristics and Specifications

  • 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.

Importance of Relationship

  • 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...

Factors To Consider: Seller Profile

  • 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,...

Factors To Consider: Contextual Factors

  • 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 Vs Sealed Bid

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...

Number of Potential Bidders

  • 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...

Playing The Game As Process Taker: The Winners Curse

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...

Bidding in Sealed Bid Situations

  • 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

Bidding in Open-Outcry Situations

  • 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...

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