The Naked Negotiator

“If I had a little humility, I would be perfect.” - Ted Turner

The 5 P’s, “Prior Preparation Prevents Poor Performance” reminds dealmakers that poor deal preparation can prove disastrous.

In July, 1985 Kirk Kerkorian, the head of MGM and United Artists called Ted Turner, the owner of Turner Broadcasting Services with an offer to sell him MGM/UA. Kerkorian told Turner he was going to put MGM/UA up for auction in two weeks, but Turner could have the company if he paid $1.5 billion - and closed the deal by August 8.

Turner desperately wanted MGM/UA films to give him control of his programming, so he sent 40 lawyers and accountants to go over the books. Then, two days before the deadline, and without any negotiation on the price, Turner signed a purchase agreement.

Analysts say he overpaid by $200 to $300 million.

Plus, he ignored that MGM was in a bad state producing a raft of poor money losing films. To boot, his lawyers failed to ask what legal commitments MGM had made. Turner did not uncover that on August 4, MGM/UA had signed a contract locking up all cable rights and that HBO had already contracted to buy several MGM movies at low prices.

Turner may have been a visionary entrepreneur but he proved an amateur dealmaker.

Poor preparation causes us to make unwise assumptions, since assumptions are the mother of all stuff-ups.

When you’re desperate to do a deal and under time pressure remember the 5P’s: Poor Preparation Prevents Poor Performance.

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An Aesop Fable on Fairness
Several animals find treasure and must decide how to divide it fairly. The lion speaks up and says, “First, we must carefully divide the treasure into four parts. The first part goes to me, since I am king of the beasts. The second part is mine, owing to my strength. The third part is mine because of my courage. As to the fourth part, anyone who cares to dispute it with me can do so, at his own risk.”

A Bitter Divorce
In 1997 Gary Wendt, the chief executive of GE Capital, divorced his fifty-four-year-old wife of thirty-two years, Lorna Wendt. Gary’s net worth was about $100 million. Lorna wanted a 50-50 split. In court, Gary argued that since it was his talents that accumulated virtually all of the wealth he was entitled to the bulk of the assets. The judge awarded Lorna $20 million. Divorce law in Connecticut calls for equitable not equal distribution of assets.

Principles of Fairness
Our notions of fairness are guided by three, often conflicting principles:

1. The principle of equality says that regardless of contribution, everyone is entitled to an equal share.
2. The principle of equity prescribes that rewards should be based on each person’s contribution.
3. The principle of need prescribes that benefits should be based on need.

Tips and Tactics

• When slicing up the cake, always ask to whom will the recipient(s) compare themselves. People often care more about how their slice compares to others than they do about the absolute size of the pie.

• Make sure the process is seen to be fair and equitable. Commitment to a deal increases when the process is viewed as just and transparent.

• Aim for simplicity, clarity, and justifiability. Perceptions of fairness increase when agreements are simple to follow, deliver clear outcomes and can be easily explained.

• Remember, our egos clash with our notions of fairness. People pay themselves far more than they are willing to pay others for the same job.

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A friend of mine confronted me the other day with a challenge.

“Harry, you’ve written books on negotiation, sales, marketing and presentation. If you had to boil all the advice into one quick phrase what would it be?”

“KFC”, I replied.

“What do you mean KFC? I didn’t ask for nutrition advice.”

I explained, “KFC. The K stands for Know what you want. The F stands for Find out what you’re getting. The C stands for Change what you do until you get what you want.”

All great persuaders, sellers, negotiators, and marketers practice KFC. They know that knowing what you want is the first critical step in persuasion. The second step is to pay attention to the feedback. Feedback is not called the breakfast of champions for nothing.

If what you tried isn’t working you change what you are doing until you get what you set out to get in the first place.

So remember - KFC:

Know what you want

Find out what you’re getting

Change what you’re doing

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I have always been fascinated by how experts make decisions. Take chess. After a quick glance at a chess board, chess masters (who have 50,000 patterns stored in their memory) can play fast “blitz chess” with minimal loss of performance.

When we first learn a skill such as chess, we are novices, we learn by rules. Experts see things that are invisible to novices.

They notice:

• Patterns
• Anomalies
• The big picture
• Opportunities
• Differences too small for novices to detect
• Their own limitations

Experts, it seems, can rely on intuition because years of experience has given them the abilities to look for the “patterns” of whatever game they are playing.

As a result, when we teach negotiators, in our seminars we are always teaching to read the patterns.

We’ve found showing learners how to “read the patterns” dramatically accelerates negotiators learning and mastery.

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In my book, The StreetSmart Negotiator (Amazom, 2005) I list a number of psychological persuasion traps deal makers fall into. Like it or not, negotiators are not always rational, Dr. Spok like characters.

Minds play tricks on the very best of negotiators. In mergers and acquisitions, the time when negotiators are most vulnerable to mind traps is during the price setting stage - when we are conducting the preliminary due diligence.

Overconfident negotiators often overlook evidence that points to deal problems. They fall victim to what behavioural psychologists call confirmation bias.The very time you need to guard against overconfidence and confirmation bias is during the preliminary due diligence. It is here that you formulate your letter of intent which includes your price range, which you hope will propel the deal forward.

Since deal makers rarely recover from an initial offer that’s too high its a mistake you have to guard against or you’ll make the same fatal mistake as Career Education Corporation (CEC).

In Deal without Delusions (HBR Dec 2007) McKinsey authors Dan Lovallo, Patrick Viguerie, Robert Uhlaner and John Horn highlight the case of CEC paying $245 million - 14 times its annual operating earning for Whitman Education Group in 2003 (the historical multiple in this industry is six to eight times earnings).

CEC executives rationalized the sector was in a phase where high prices were the norm. They weren’t. Prices have fallen back to their historical levels.

Overconfidence coupled with confirmation bias is a fatal mix when acquiring companies. So beware!

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