Making your threats real

I wrote a post about a month ago in my M&A series about drawing lines in the sand (see the original post here).  In it I argued that people negotiating m&a deals are too quick to dig in and make statements that they can’t/don’t intend to back up. 

I was reading Ben’s blog today – his latest post references a HBS article on a similar subject that is worth a read.  Here’s the quote that Ben pulled from the article that pretty much sums up its contents.  When you look at the article pay attention to their point # 5 – it’s exactly what I was talking about in my earlier post.

"In the classic game of Chicken, two drivers on a crash course speed toward each other. The rules are simple: Whoever swerves first and avoids collision loses, and whoever is brave enough to stay the course wins. Of course, when both drivers stay the course, they collide and die. Clearly, this is not a game for the faint-hearted. But bravado alone doesn't guarantee a win. Your opponent has to believe that you're gutsy enough to stay the course, or he may do the same until the very end. How do you win at Chicken? One approach would be to talk tough beforehand. You might behave irrationally to suggest that you wouldn't swerve even to save your life. Once the game begins, however, your threat simply may not be credible.

Now consider this strategy: Once the cars are headed directly toward each other, you unscrew your steering wheel and throw it out the window, making sure that your opponent sees you do it. Foolish? So it would seem, but your threat is now entirely credible. You can't change course even if you wanted to. It's up to your opponent to decide whether to lose the game or die. The odds are in your favor."

Comments

[The Unknown Professor]

The "throwing the steering wheel ou the window" is known in game theory as a "precommittment strategy". A classic example is the vikings burning their boats after they'd landed in a foreign country. That way, they could only go forward (and the people they were fighting knew that).

[The Unknown Professor]

As I was re-reading the post, I thought of two good books on related topics for your readers to check out. The first is "the Secrets of Power Negotiating" by Roger Dawson. He goes into pretty much every facet of negotiating in almost any setting imaginable. Very amusing, and it even comes on tape. It's one of my most valuable resources, and has saved (or made) me many tens of thousands over the years.

The second is "Thinking Strategically" by Dixit and Nalebuff. It covers the topic of "game theory" which is the study of strategic behavior. They're two of the top academics in the field today, but the book is pitched for the average reader - short on numbers, long on stories and illustrations. It's a great read for anyone in business.

[JLP of AllThingsFinancial]

Actually, don't you make the game of chicken easier on the other guy because he knows you can't swerve. Had you not thrown out the steering wheel, the other driver would knew there were three possibilities:

1. You wouldn't swerve.
2. You would swerve left.
3. You would swerve right.

By throwing out the steering wheel, only option one remains.

Interesting post!

[Jake Kaldenbaugh]

I actually have a different approach to negotiations and that is to focus on the benefits to be accrued to the acquiror. Often, acquirors will tell you why they're interested in acquiring a company in the very beginnings of a process. If a roadblock occurs in price negotiations, getting to the CEO and reviewing the strategic advantages that were envisioned in the first place and demonstrating that taking action will allow for progress against that strategy usually helps to bring the negotiations to a close.
I don't like the chicken analogy because it sets up the negotiations as adversarial, which is not a good perspective to have. If you're a deal-maker and your perspective is 'to make the other side blink' then you're probably cutting your ability to do additional deals in the future.
Negotiations are actually simple from a seller's point of view. You either have negotiating leverage or you don't. Leverage usually means presenting financial and operating metrics early in the process that you know you will beat, not *hope* you will beat. Second, being biased towards going it alone or having multiple bidders makes it a process that maximizes value. The real problem is that most companies view a sale as an alternative after they've run out of other options.