Lecturer: Jeff Montrose Department of Business Languages Catholic University of Eichstaett Ingolstadt

An overview on determinants of negotiation outcomes in the light of (international) M&A business

Submitted by: Ngoc Phuong Linh Bach Matriculation number: 604693 Major: Master FACT Email: linhbach@gmail.com

 

Effective Meetings and Negotiations

An overview on determinants of negotiation outcomes in the

light of (international) M&A business

(WS 2011/2012)

Lecturer: Jeff Montrose

Department of Business Languages Catholic University of Eichstaett Ingolstadt

Submitted by: Ngoc Phuong Linh Bach 604693 linhbach@gmail.com

 

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Table of contents

Table of contents ............................................................................................................ i 

List of figures .................................................................................................................. ii 

1.  Introduction ............................................................................................................. 1 

2.  Negotiations ............................................................................................................ 2 

2.1  Overview ......................................................................................................... 2 

2.2  Challenges in M&A negotiations ................................................................. 3 

3.  Theoretical background ........................................................................................ 5 

3.1  Determinants of negotiation outcomes ....................................................... 5 

3.2  Theoretical predictions .................................................................................. 8 

4.  Result ....................................................................................................................... 9 

5.  Conclusion ............................................................................................................ 10 

References ................................................................................................................... 11 

 

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List of figures

Figure 2-1: The framework of successful acquisition management with regard to

the pre-acquisition management phase .............................................................. 4

Figure 2-2: Application of the iceberg model for M&A negotiation ...................... 5

Figure 2-3: Culture as an iceberg ........................................................................ 5

Figure 2-4: Determinants of negotiation outcomes .................................................. 7 

 

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1. Introduction

Business with Mergers and Acquisitions (M&As) has become an international

phenomenon in the last decade. It has been considered as one of the most efficient

instrument of corporate growth strategy all over the world. During my working time in

Vietnam as well as in Germany, I have had chances to take part in M&A processes

and this business field has interested me greatly. M&A business, especially M&A

negotiation is a complex process, of which success is a combination of individual

traits, professional experience as well as the sensitivity in dealing with others who

might or might not share the same interests. Negotiation is, therefore, a mind game,

in which a variety of questions should be answered before and during the negotiation

process, such as “What objectives I and my opponent want to achieve?”, “How can I

recognize and explore the interests of my opponent? Do we have mutual goals?”,

“What negotiation strategy is best appropriate?”, etc.

This paper attempts to show the major factors that decide on the success or failure of

M&A negotiations in the light of international business environment and is devided

into 5 parts. The first one is the introduction. The second one focuses on the

challenges in negotiations and M&A negotiations in particular. In the third one, major

determinants of negotiation outcome will be briefly introduced, which is the basis for

the design of theoretical predictions. The fourth chapter will seeks to examine the

theoretical predictions by reviewing some relevant literatures with regard to

(international) business negotiations. Finally, a clonclusion on the researched subject

will be given.

The most important limitation of this paper lies in the fact that the literature has paid

no remarkable consideration to negotiation process and its influential factors

concerning value-based interests. “In general, the literature on negotiation is

focussed on a few categories of interests and has been considered fragmented and

a-theoretical” 1 . All the designed predictions of this paper, therefore, can not be

investigated in all aspects.

                                                            1   cf. De Mattos/Salciuviene/Pugliese, 2008, p. 247. 

 

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2. Negotiations

2.1 Overview

In literature, a global definition of the term “negotiation” does not exist. American

Heritage Dictionary (2000) considers negotiation as “to confer with another or others

to come to terms or reach an agreement, to arrange or settle by discussion and

mutual agreement”. Meanwhile, Thompson highlighted the essential of negotiation for

both individuals and organizations because of the dynamic nature of business. In this

context, he also emphasized that beyond bargaining negotiation can also create

opportunities.2 Furthermore, the complexity of negotiation can be described by the

fact that “negotiation is not just a matter of following fixed rules. Every negotiation is

special. Each negotiation is affected by the host of different factors in many different

ways”3. That explains the reason why the outcomes of negotiations often are more

likely out of expectations of at least one of the parties involving. In his analysis,

Bazerman lists five common mistakes made by negotiators which could overlap one

another and lead to negotiation failures. The first one is the fixed-pie bias which

prevents parties from looking beyond the deal and therefore blocks the integrative

problem-solving or, to be precise, integrative trade-off. As a result, it is impossible to

reach a win-win situation.4 Moreover, the outcome can be affected when a party

does not succeed in de-hexing the winner´s curse. In this situation, the party enters

the negotiation without sufficient qualified information and a thorough valuation of the

discussed subjects, especially in case of asymmetric information.5 An unfavorable

outcome at the cost of the party is unavoidable. Likewise, outcome can be

unfavourable when de-escalating conflict fails. It is the case when both parties are in

a highly comparative situation and follow their egos so blindly that they overlook or

trade off their constituent´s best interests with saving face.6 In other words, both

parties have great difficulty in separating people from the problem or issues from

interests. Only the willingness to create a harmonious atmosphere and looking

                                                            2 cf. Thompson, 2001, p. 3. 3 Salacuse, 1991, p. 3. 4 cf. Bazermann, 2001, pp. 219 – 220. 5 cf. Bazermann, 2001, p. 220. 6 cf. Bazermann, 2001, pp. 221 – 222. 

 

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beyond the bargaining table might help both parties find a common ground and save

them from a already losing battle. In addition, overconfidence and overestimation

might cause desincentive to compromise. Thus, negotiation outscome likely

underperforms.7 Last but not least, individual perceptions of their situations have

great impact on negotiation strategies and outcomes. It raises the so-called question

“Is the glass half full or half empty?”. Usually, parties see the outcome through a

gain-loss frame. The more their perceptions move towards the gain direction, the

more willing to make concession they are and vice versa. Their behaviors and

decisions are, therefore, merely a sequence of reactions corresponding to their

perceptions on the outcome with regard to the gain-loss frame, while their actual

preferences have passed them by. 8 To put it briefly, Bazar emphasized the

dependency of negotiation outcome mostly on the perception as well as the

characteristics of negotiators which are going to be explored in the next chapters.

2.2 Challenges in M&A negotiations

In the last decade, Mergers and Acquisitions has become one of the most favourable

instruments of corporate growth strategy. The volume of M&A transactions reaches

on average USD 2 trillion per year, of which the failure rate is estimated from 70% to

90%. 9 This remarkable failure rate is the consequence of either ineffective pre-

acquisition management or ineffective post-acquisition integration. This paper,

however, seeks to address the failure of M&A transactions with regards to the

ineffective pre-acquisition management or, to be precise, the ineffective negotiations.

A well-prepared pre-acquisition process assures not only closing of transactions but

also successful post-acquisition integration afterwards.10

In M&As, negotiation is a lengthy process, in which parties tend to focus so strongly

on setting price or exchange ratio that they forget to look beyond look beyond the

bargaining table. By fixing too much on hard facts, such as prices and general terms,

                                                            7 cf. Bazermann, 2001, p. 222. 8 cf. Bazermann, 2001, pp. 222 – 223. 9 cf. Christensen et al., 2011, p. 49. 10 cf. Kim/Olsen, 1999, p. 25. 

 

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every so often negotiators might forget to define their objectives before the

negotiation takes place. Drayto, Emerson and Griswold describe the objectives of

negotiation as a process of collecting information, exploring underlying motivations

and mutual interests. 11 Those are value-based information which would be

thoroughly analysed in order to identify the strengths and weeknesses of the

opponent. In that way, the party can determine its bargaining position and be well-

prepared for different bargaining scenarios. As a result, the party can de-hexe the

winner´s curse, create alternatives in accordance with mutual interests and thus,

achieve a win-win situation through integrative negotiation. This consideration is also

supported by the acquisition process framework designed by Kim and Olsen.

 

Figure 2-1: The framework of successful acquisition management with regard to the pre-acquisition management phase (Kim/Olsen, 1999, p. 24)

In an article published in Harvard Business Review, Deepak, Malhorta and Bazerman

show the importance of investigative negotiation which reinforces the acquisition

process framework. Negotiators should overcome their assumptions and gather

critical information about the opponent and all related issues in order to explore the

opponent´s motivations and understand the issues in a new dimension.12 In this

context, it is to be pointed out that demands reveal needs and interests. Those are

highly valuable information employed to create alternatives and determine value. For

that reason, it would be wise to take a deep look into the seemingly unreasonable

demands of the opponent in order to deploy the hidden opportunities.13

Furthermore, it is also tricky to separate people from problems. At the bargaining

table, negotiators are human beings with emotions, which more or less direct their

behaviours dramatically. That phenomenon can be illustrated by the iceberg model

                                                            11 cf. Drayto/Emerson/Griswold, 1963, pp. 125-126 12 cf. Deepak/Malhorta/Bazerman, 2007, p. 74. 13 cf. Deepak/Malhorta/Bazerman, 2007, p. 76.  

Motive Information Value Price Approach

 

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Doing/ behaviour

Beliefs

Value and thought patterns

Negotiation strategy Demands, interests, objectives Emotions

Unique set of value orientations

of a society

Negotiation outcome

developed by Hall. According to Hall14 (1976), culture of a society can be seen as an

iceberg. While some aspects of culture are directly observable, the large portion is

below the water. The differences in appreciation of problems and negotiation

strategies are namely the product of different perceptions which are underlain by

cultural values and thought patterns. For that reason, a negotiator needs to unveil

those underlying value and thought patterns of the opponent in order to explore the

opponent´s demands, interests and negotiation strategy.

3. Theoretical background

3.1 Determinants of negotiation outcomes

There is a wide variety of factors that impact the outcome of M&As concerning the

negotiation process. For that reason, this paper will follows a large and growing body

of literature that has focused on identifying specific reasons for either M&A failure or

success. On that basis, it is logic to narrow down the impact on the whole M&A

process to its pre-acquisition process, namely the negotiation. Thus, only influential

factors of negotiation outcomes are of interest. At this point, it is also important to

stress that international M&A negotiations are also taken into account. In their case-

study, De Mattos, Salciuviene and Pugliese identify five factors that affect the M&A                                                             14 The idea of a cultural iceberg was developed by Edward T. Hall in “Beyond culture” (1976).

Figure 2-2: Application of the iceberg model for M&A negotiation

 

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Figure 3-1: Determinants of negotiation outcomes

The most important factor among the subjective determinants is the cultural

influences, which influences not only the other factors within its group but also the

objective determinants. The more international the M&A negotiations are, the more

dominant this dimension is.18 There is a strong interdependence within the subjective

determinants, in which the cultural background reigns. The cultural differences can

be demonstrated by a variety of factors, such as language, perception, held values.

While language difference, according to iceberg model, is visible, perception and

held values can hardly be observed and are reflected by negotiation strategy,

expressed emotions and demands and interests of negotiators. Furthermore, the

cultural differences can also be observed by using Hofstede´s framework which

shows how national culture has impact on work-related values. Hofstede recognized

four independent dimensions: power distance, uncertainty avoidance, individualism

versus collectivism and masculinity versus feminity.19 Another subjective determinant

is individual characteristics which are also influenced by cultural background and

experience made throughout one´s life. Certain characteristics, such as quick mind

and patience are required for a good negotiator. 20 It is important to bear in mind that

there are hardly negotiators with born skills. More likely, negotiation skills are

learnable.21

As mentioned in chapter 2.1, individual perception of negotiation approach would

determine negotiation strategy. An appropriate negotiation strategy, in which mutual

interests are taken into consideration, assures a positive outcome. The negotiation

strategy is, furthermore, dependent on the condition of negotiation comprising

“influences from the environment and organisation related factors”22. This dimension

implies the nature of a deal concerning the following questions: Is the transaction

friendly or hostile? Are the parties able to seek a common ground? Are their strategic

goals complementary? Thus, this dimension can greatly contribute to the decision of

                                                            18 cf. De Mattos/Salciuviene/Pugliese, 2008, p. 250. 19 cf. Mead, 2005, p. 39. 20 cf. De Mattos/Salciuviene/Pugliese, 2008, p. 251. 21 cf. Thompson, 2001, pp. 6 - 7 22 cf. De Mattos/Salciuviene/Pugliese, 2008, p. 250.

 

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an appropriate negotiation approach between fixed-pie bias, distributive and

integrative negotiation and impact the negotiation outcome. Last but not least, the

gender of negotiator might direct the negotiation subconsciously. On one hand, men

and women have different communication manners. Since young, where they grow

up environments.and learn how to speak and build up relationship with others is

different. For example, girls seek for common goals and learn to use their language

to negotiate a harmonious and sympathetic relationship. Meanwhile, boys wish to

emphasize the differences between themselves and other members and use

language to negotiate their status.23 On the other hand, how and what we talk is

received and interpreted again differently because of our cultural filter, 24 namely in a

similar manner to “the beauty is in the eye of the beholder”. That amplifies the

differences between men and women at the bargaining table.

3.2 Theoretical predictions

Based on the above mentioned determinants, the impact on negotiation outcomes

can be predicted as following:

 

 

 

                                                            23 cf. Tannen, 1995, p. 140. 24 cf. Tannen, 1995, pp. 145 - 146. 

Prediction 1 Language barrier has significantly negative impact on negotiation outcome

Prediction 2Cultural mismatch arises only in case of international business negotiations (cross-border negotiations)

Prediction 3 Experienced negotiators always win

Prediction 4 Men are better negotiators than women

 

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4. Result

In order to examine the given predictions, the findings of different literatures listed

below will be reviewed:

(1) Ragon (2011): Does Gender matter?

(2) De Mattos/Salciuvien/Pugliese (2008): Investigating the role of international

business negotiations in cross-border M&A in the banking sector

(3) McDonald/Coulthard/de Lange (2005): Planning for successful merger or

acquisition: Lessons from an Australian study

(4) Metcalf et al. (2006): Culture tendencies in negotiation

Prediction 1: Surprisingly, in the analysis conducted by De Mattos, Salciuvien and

Pugliese the interviewers believe that different languages did not have significant

impact on the negotiations, on the condition that there is a common language for

parties. This statement is supported by the fact that negotiations between Germans

and Italians with proficiency in English met no difficulties. It is also noted that

misunderstanding concerning differences in language was found at lower hierarchical

levels.25 Prediction varies from the emperical study.

Prediction 2: According to the emperical study carried out by Metcalf et al.,

“individuals and groups within maybe united on some dimensions, deeply divided or

split on others, and uncommited on others”26. Prediction is not confirmed.

Prediction 3: The findings in “Planning for successful merger or acquisition” reveal

that past experience can not be applied across situations because negotiations,

especially international business negotiations are always complex and different.27

“The lessons learnt from each would not necessarily translate to other companies”28.

This opinion is also supported by Thompson.29 Prediction is negated.

                                                            25 cf. De Mattos/Salciuviene/Pugliese, 2008, p. 250. 26 Metcalf et al., 2006, p. 12. 27 cf. McDonald/Coulthard/de Lange, 2005, p.8. 28 McDonald/Coulthard/de Lange, 2005, p.8. 29 cf. Thompson, 2001, pp. 6 – 7.

 

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Prediction 4: No clear evidence has been provided that men are better negotiators

than women. However, women consider all possible outcomes, while men take

merely potential positive ones into account. That makes female negotiators under

circumstances more acquisitive than male negotiators.30 Prediction is proven to be

wrong.

5. Conclusion

Negotiation and international business negotiation in particular is a very complex

process, for which a thorough preparation is decisive for a positive outcome. Due to

the fact that negotiation requires practical learnt skills and an in-depth analysis of

negotiaton conditions concerning objectives, mutual interests and demands of one´s

own and of his opponent, the chance for a successful negotiation tends to be thin. In

the in-depth analysis, major aspects of cultural background should be taken into

consideration. However, the cultural stereotypes should only be used as the best

guess, which should be dramatically adjusted during the process at the bargaining

table. In this way, interests and demands of the opponent can be explored in order to

capture and create more value of the deal for all parties. Therefore, alternatives are

expanded and a win-win situation is more easily to be reached.

                                                            30 cf. Ragon, 2011, p. 57, p. 59.

 

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References

Ashermann, Ira G./Ashermann, Sandra Vance (2001). “Why negotiations go wrong.

In: The Negotiation Sourcebook”, 2nd ed., pp. 219-223. Amherst: HRD Press

Christensen, Clayton et al. (2011). “The New M&A Playbook”. In: Harvard Business

Review, Vol. 89, No. 3, pp. 49-57

Connell, Richard (2010). M and A performance improvement: A non-traditional view.

In: Journal of Management and Marketing Research, 5, pp. 100-121

Deepak, Malhorta/Bazerman, Max H. (2007). “Investigative negotiation”. In: Harvard

Business Review, Vol. 85, No. 3, pp. 73-78

De Mattos, Claudio/Salciuvien, Laura/Pugliese, Gianluca (2008): “Investigating the

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Drayton, Clarence I. Jr./Emerson, Craig/Griswold, John D. (1963). “Mergers and

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McDonald, Jarrod/Coulthard, Max/de Lange, Paul (2005). “Planning for a succesful

merger or acquisition: Lessons from an australian study”. In: Journal of

Global Business and Technology, Vol. 1, No. 2, pp. 1-11

 

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Mead, Richard (2005). “International management – Cross-culture dimensions”. 2nd

ed. Oxford: Blackwell Publishing

Metcalf, Lynn E. et al. (2006): “Culture tendencies in negotiation”. In: Journal of

World Business, Vol. 46, No. 1, pp. 382-394

Ragon, Pamela (2011): “Does gender matter?”. In: Financial Executive, pp. 57-60

Salacuse, Jeswald W. (1991). “Making global deals: negotiating in the international

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Tannen, Deborah (1995). “The power of talk: Who get heard any why”. In: Harvard

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Thompson, Leigh (2001). “The mind and heart of the negotiator”. 2nd ed. New Jersey:

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