Negotiation of M&A deals

There are 4 main questions that any skilled negotiator will ask himself while entering into negotiations for an M&A deal: What, Why, When, and How?

What is Negotiation?

Negotiation means to enter into discussions to reach an agreement. It can be a meeting at any place, be it a casual discussion over coffee, at a social gathering or in a boardroom. You should not value the seriousness, or the sway of the negotiation only based on its venue.

Negotiation is a mix of skill, art and science. It is a skill because it develops over time with practice and real-life events that shape your negotiating style. You cannot expect to become a master negotiator just upon reading about negotiation. However, negotiation is also a science. There are some established principles, techniques and guidelines that have been tested and which gained recognition over time. Negotiation is an art because it is a recipe that requires a careful mix between scientific principles, skill, instinct and the peculiar circumstances of the deal.

?Why should you Negotiate?

??????I.?????????To Get What You Want. This is the basic motive behind any negotiation. When the other party is unwilling or uncertain, you naturally try to negotiate with them, to try and reach the point at which they will agree.

????II.?????????To Give What You Can. Any contract or bargain is only struck when both parties get something out of it. You have to give something to get something. In M&A, this is usually in the form of compensation for acquiring the target company. This may be in the form of shares, cash, assets – tangible or intangible, etc. Therefore, be prepared to let go of something to get what you want. Make a list of the things you absolutely need and the things that your business can let go of in the deal. Use this list to identify your hard and soft limits during the negotiation. Be careful to keep the other party in the dark about these until the last possible moment to retain your advantage of bargaining power.

??III.?????????To Bridge the Gap. Often, you may reach a point (the standstill/impasse/dead-end) where neither party is willing to budge from their demands. This is where you need to bridge the gap. Try to find solutions and compromises that both parties can live with. Remember: you will try to make the deal work as long as both parties recognize that the deal is important to them!

??IV.?????????To Discover and Overcome Shocks and Surprises. You might come across some hidden intentions/facts/motives that the other party may accidentally reveal during the negotiation. This discovery will help you to decide whether you want to continue with the deal or revise your negotiation strategy, demands, etc. Therefore, it is important to negotiate so that you can detect, discover and deal with such shocks and surprises.

When does the Negotiation happen in an M&A?

??????i)?????????During the promoters’ initial discussions. Here, you are at the infancy of the deal. You have just started to discuss the idea of the deal and see if the other party is interested. Conversely, the other party may have approached you. These initial discussions between the promoter group i.e., owners and persons holding controlling shares in the business, are also in the nature of negotiations.

????ii)?????????While drafting the MoU. Discussions about what clauses to add in the Memorandum of Understanding (MoU), the parties to it, and how detailed you want it to be are a stage of negotiations. These discussions are important as the MoU is the foundation document of the deal which determines the rights, liabilities, functions, duties of the parties and the structure of the deal. So be careful while negotiating these terms.

??iii)?????????Before Drafting the M&A Agreement. After the MoU is finalized, signed and sealed, the next document in the M&A Agreement. Be sure to hash out the clauses of the Agreement before executing it. It is always better to appoint a lawyer to represent your business during the M&A deal and especially for drafting the documents.

??iv)?????????While Drafting/Revising/Re-visiting the Agreement. Be prepared to go back and forth on the terms and conditions of the M&A Agreement. Throughout the documentation, external factors such as government regulations, policy changes, market trends etc. and internal factors such as sales performance, supplier and customer deals, etc. affecting the deal will influence and change certain terms of the deal. You may have to then re-negotiate those specific clauses in the Agreement.

?What you should Know before you negotiate

Acquire knowledge of certain key aspects before you prep for your negotiation. Knowledge is an important tool. These are the basic aspects you need to know before you negotiate:

1.????Know The Opposite Party. Understand, learn and appreciate the values, intent, viewpoint and needs of the other party. Why are they willing to negotiate? What do they want out of it? And what will they be willing to let go? These points will determine the outcome of your negotiation.

2.????Know Their Business. Understand and learn the business and the industry of the other party. What products or services do they offer? How will the M&A benefit them? How will the M&A manifest in their industry or business and how will it affect that industry and their competition? Does that industry have peculiar regulations, laws or requirements for M&A?

3.????Know The Economy. Understand the economic climate of the region. Is it a good time for the other party to enter into M&A? How does the economy strengthen/weaken their stance?

4.????Know The Customs. Each industry has its own unique customs and practices which have been followed for a long time, are known throughout the industry and become standard practice. It is accepted and followed within the industry even if there is no law or regulation mandatorily requiring it. Often, the other party might insist on including such customs within your M&A deal and your negotiations will be influenced by them.

5.????Know The Market Practices. Understand the chain of supply, suppliers, wholesalers and the general market practices within that industry. This is important for you to grasp how goods are priced, and the profit-making, sale and marketing strategies used by the other party.

6.????Know The Market Trends. Each industry on the stock market is affected differently by changes in the environment. To understand this, you must know what makes the share price fluctuate? What external factors is the share price sensitive to? And what are the current trends in the market? Are prices radically increasing, stable or decreasing?

7.????Know of Similar Deals. History always gives us a better idea of what you should and should not do. Looking at similar deals of the past will show you what to beware of. For example, if a merger in the pharmaceutical sector two months ago fell through because they failed to negotiate some key pricing conditions, you will know to do so when you negotiate an M&A in that industry.

How to Negotiate

There are negotiating strategies that you may need to adopt before you negotiate. You can prepare yourself in the following ways:

·??????Be an information freak. Acquire all the information and knowledge that you need to negotiate based on the above paragraphs. Nothing is over the limit or out of bounds.

·??????Learn and contribute to the negotiations. Don’t be a silent spectator. Be an active participant.

·??????Play a role end to end, in all aspects. If you choose a particular strategy, stick to it. Whether you play an aggressive or passive role to get the best for your side in the negotiations, stick to the role throughout.?

·??????Don’t be a reader or interpreter, be a solution provider. Don't just summarize, repeat or re-iterate the points of negotiation. If there is a stalemate, find solutions for it. If there are disagreements during the negotiations or if there is a gap that needs to be met, do not just point them out. Try to come up with solutions to overcome them so that you can reach an M&A agreement.

**************

This is eighth article in the series on #mergersandacquisitions by our student researchers Swasti Patoria, Annapurna Prabhu, Astha Agarwal, Aayomi Sharma, Amrutha Alapati and Aradhya Singh, students of Jindal Global Law School (JGLS) Symbiosis Law School, Pune and Symbiosis Law School, NOIDA

?

For access to similar interesting articles on legal and business issues, you may subscribe to our Newsletter here https://www.dhirubhai.net/build-relation/newsletter-follow?entityUrn=6920355551797215232