While this article highlights our experience in the banking industry, the strategies presented here are applicable for anyone in any industry engaging in a transaction.
Over the last ten to twenty years in negotiating deals, we have learned that there are many different styles of negotiating when getting a deal done. Some of the most useful and realistic ways to approach various scenarios are fairly simple but they can be easy to overlook while in the line of fire. It is always our objective to achieve our clients’ goals and make them comfortable with the deal. As such, below is a list of things that we know from experience help create value for a deal.
The way to become confident in any transaction is to always be prepared. In being confident we should be able to anticipate issues that could arise in the course of negotiations. We spend many hours reviewing the material that is important to the deal as well as any related information. Thanks to the FDIC, there is a wealth of information available on the purchaser and the industry as a whole. Historical financial information, deposit market share and acquisition history enable us to understand the purchaser’s acquisition rationale and how your bank might fit into the combined organization.
By asking for more than you actually expect to receive, you are establishing a perceived value to the other side that may be beyond actual value. This concept also provides room to compromise later if we need to do so and still helps to achieve a transaction that meets our client’s expectations. This strategy also helps break any deadlocks and keeps the discussions open to move the transaction along.
By asking for more than we expect, it gives the other side the feeling that they have won a point or two when expectations are lowered. The point of any negotiation is to be fair and achieve a win-win situation for all parties involved in the deal. At the end of the process, we are all better off if we actually achieve this. An acquirer’s focus on a specific performance measure often creates an unnecessary and sometimes unrealistic price ceiling. Public acquirers will likely focus on dilution, thereby making price-to-earnings multiples the most important pricing measure. Conversely, a privately held entity may focus on a “build or buy” strategy, which may hinge on a certain return on investment. By catering to an acquirer’s perspective while pointing out other important pricing multiples, return measures and synergistic possibilities it is often possible to justify a higher price than initially offered by the acquirer.
One of the issues that we all have to keep in mind is the timeframe under which we work. Always keep timeframes in mind in doing a deal. Deals usually take time to complete yet by controlling the timetable we should keep logs and try to push the other side as quickly as possible. It is our practice to continually give the other side a timeframe that requires certain conditions be met at specified times. In an industry that depends heavily on personal relationships, every effort needs to be made to retain key employees. The uncertainty created by drawn-out negotiations can possibly lead to employee dissatisfaction and the corresponding loss of customer relationships.
It is helpful in negotiations to let the other side get to know you and also for you to get to know them. This helps to bring things in focus and helps make the negotiations more personal which can create better lines of communication.
Negotiations can be very tense and emotions will enter the picture at various times during the process. Don’t let emotions play a role and always try to leave the door open if and when negotiations stall because there is usually another opportunity to reopen the door later.
We recently worked with a client who was ready to sell a fast-growing, profitable bank to a regional institution. Negotiations stalled due to some unresolved litigation. The buyer was unwilling to consummate the transaction without significant escrow, while the seller did not want the escrow amount to be misinterpreted by the courts as an admission to liability. Buyer and seller agreed to keep the lines of communication open and to pick up negotiations upon termination of the dispute.
It’s not uncommon to deal with others that might test your patience, but learn to hold on for the good of the deal. Be aware that it is important to be careful in your reactions to the way others try to negotiate. If we are flexible and do not take things personally, the process is smoothed.
Know the facts and do not say something or reveal information that may come back to haunt you. If you do not know something, say so. Advise the others side that you will get back to them after you have confirmed the information. This keeps things in perspective and sometimes helps move the deal along. Several years ago, one of our clients purchased a bank that held a significant amount of problem loans. Dishonesty regarding the quality of the loan portfolio resulted in the seller’s loss of the full escrow amount in addition to the primary owner’s substantial consulting agreement.
There are times in any negotiation to draw the line and other times to be flexible. Sometimes others want to draw the line in the sand at an early stage of the negotiation. We always attempt to show them that this is not the time to battle over a certain item and we may want to save this issue for another time. Always keep the end goal in mind and be careful in picking your battles.
In the deal process others may want to take shortcuts in trying to move to the next step. We do not believe in shortcuts. In the banking industry, we know that a high quality loan portfolio is never the result of loan officers’ shortcuts. Clearly, the purchase of an entire bank, with 60% or more of its assets generally represented by loans, will require a significant amount of due diligence.
In all deals there are tense moments that may cause stress to all concerned. We have find that sometimes the use of appropriate humor helps to lighten the mood and move the process along.
If you keep these ten simple but important hints in mind as you go through the negotiation process, you are on your way to a successful negotiation where all parties will win and the deal will get done.
Reprinted from Mercer Capital’s Transaction Advisor, Volume 5, No. 2, 2002.
Jeff K. Davis is the Managing Director of Mercer Capital’s Financial Institutions Group. The Financial Institutions Group works with banks, thrifts, asset managers, insurance companies and agencies, BDCs, REITs, broker-dealers and financial technology companies. Prior to ...
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