This article will give you some practical advice and show you how I negotiate during a business acquisition.
In December 2004, Johnson & Johnson (J&J) announced plans to acquire the pacemaker manufacturer Guidant for $25.4 billion.
Soon after the announcement, Guidant recalled 170,000 pacemakers, 56% of its total production.
Concerned by this development, J&J threatened to pull the offer but eventually countered with a reduced price of $21.5 billion.
Here’s where things get really interesting.
Boston Scientific, J&J’s longtime competitor, heard the news and decided to offer $24.7 billion for Guidant. This triggered a bidding war that ended a year later when Boston Scientific acquired Guidant for $27.2 billion—$1.8 billion more than J&J’s initial offer.
Soon after the acquisition, Boston Scientific recalled 23,000 pacemakers and directed 27,000 patients to consult their doctors. As a result of this development, Boston Scientific’s share prices dropped from $25 to below $17 and the Guidant acquisition became termed “arguably the second-worst acquisition ever”.
There’s a common misconception in what it means to negotiate the best possible deal.
The Guidant acquisition teaches us not to bargain for the sake of bargaining, and that a great deal should be defined by the potential of the investment you’re making.
You could purchase a new business for 30% of the asking price, but how good is that deal if the business is worthless?
A negotiation approach focused too narrowly on “winning” the negotiation is often too short-sighted, driven by misguided competitive attitudes, and likely to negatively influence transparency and trust in the conversation.
As a business buyer, your negotiation strategy should be about taking measurable steps to ensure that the deal you’re structuring is truly reflective of the business opportunity at hand.
To be able to fully assess what that business opportunity is worth, you’ll need to be informed to do your due diligence.
With that complete, you’re now ready to start outlining the terms of your deal. Below are some tips on how you can make sure those terms are as favorable as possible.
Ambitious, but not Extreme in Counteroffers.
Offers and counteroffers play a critical role in negotiation.
They can create impasse and stop the negotiation from going forward, or can signal to the other person that you are negotiating in good faith. There’s a dilemma at play when offers and counteroffers are being exchanged, and it is critical in influencing the final agreement.
Counteroffers asking for too much of a concession can stop the negotiation in its tracks, and counteroffers not asking for enough of a concession can hinder you from getting the best deal possible.
While there is no perfect model for predicting exactly which offer is extreme and which is just ambitious enough, here’s how I’ve approached this challenge in the past.
If the counteroffer is likely to result in the seller walking away entirely and not wanting to deal with me anymore, it’s likely that that offer is extreme. If the counteroffer may disappoint the seller, but it’s highly likely they’ll continue the conversation then I’m probably in the right place.
Keep in mind that their response will also be influenced by the amount of options and other offers they have on the table.
To strengthen the influence of your counteroffer, and to increase the chances of them continuing to negotiate, be very precise in your counter and explain how you’ve arrived at that proposal.
Research supports both of these tips. Offers and counteroffers that are precise, and not round are more potent. Requests for behavioral or mindset shifts are much more powerful when they’re coupled with detailed explanations.
Be Assertive, but Flexible.
In negotiating with the business seller, your communication approach should be assertive and direct in nature, but be flexible enough to consider creative ways you can structure the deal.
This does not mean that you should be ready to compromise. Rather, you are confident in your counteroffers and requests and flexible enough to take into account the seller’s ideas.
I acquired a SaaS business recently, and in that transaction the seller agreed on a sizable reduction in the price through his suggestion of me buying the technology of the software, and allowing him to keep the website domain for resale.
It was easy for me to find and buy a new domain, and he sold his domain to compensate for the reduction. This type of win-win agreement happened in part due to the rapport, and the positive exchange and brainstorming the seller and I had. It also happened because of my ask for a price reduction, but flexibility about ways in which that request was met.
Being assertive, flexible and ambitious are critical steps buyers can take to ensure they negotiate the best possible deal for their business acquisition.
In my next post I’ll delve deeper into how both buyers and sellers should respond to requests for concessions.