Using Mediation Techniques to improve M & A outcomes
Last summer I had the great pleasure of presenting a paper on the use of Mediation Techniques to improve the outcome of M&A deals at the Fordham conference on Arbitration and Mediation. The papers from the conference have now been published by Martinus Nijhoff as part of their Contemporary Issues in International Arbitration and Mediation series. That so many M&A deals fail to deliver the anticipated share holder value is obviously a matter of concern and I am convinced that using techniques derived from mediation could substantially reduce the likelihood of consummating a bad deal.
Here are some brief extracts adapted from the paper. I am offering workshops and talks that go into the subject in much more depth so if this is something that would interest your organisation please get in touch.
” We have all been there: it is two in the morning, management has been working on the deal for months, outside counsel has produced files full of reports, finance is already including projections for the combined organisation in the budget and the draft contracts are in their umpteenth iteration; you turn to your client as yet another unhelpful fact emerges and noting that it does not look very good to enquire if the client really wishes to continue. The client pauses for perhaps a nanosecond before responding that ”the fundamentals are still there” and with the various discounts, warranties and other safeguards so brilliantly negotiated it is still worth it. It is like a kind of “sales fever” where everyone ignores the fact that no matter how much that orange nylon dress is reduced it will still never be wearable
So, why do these deals go ahead?
In part I think it is that the deal takes on a life of its own:
- The negotiating manager may fear loss of face or even career damage if he “fails” to deliver the deal;
- Having been given responsibility he may be reluctant to appear weak or to lack seniority by asking for advice or help;
- The macho culture works against timeouts or even deferment to the next day with negotiations now traditionally going on into the early hours – negotiation by exhaustion!;and
- So much work and expense has already been devoted to the project it has become in effect, inevitable.
Could the use of mediation techniques lead to a different outcome?…..
Generally discussions about the use of mediation in deal making have revolved around using mediators to break a negotiation impasse, to facilitate discussion on ancillary matters such as staff benefits, or to resolve disputes along the way where a complex deal involves the implementation of interrelated contracts over a period of time but in what other ways might mediation skills contribute positively to the M&A process."
The process can be divided into the following stages
- Identification of target
- instruction of counsel
- indicative offer
- due diligence
- negotiation
- implementation
[Mediation techniques can be used at each stage but in this abbreviated paper I want to look at only the implementation and instruction stages.]…..
Increasingly management consultants have been used [to assist with implementation but while they may have their uses in my experience]…. in their interaction with staff and individual departments it seems to me that they are pushing box ticking and “one size fits all” rather than actually listening to the employees themselves and seeking to address the roots of the concerns. As well as inevitably putting people’s backs up this is also a missed opportunity.
[The Mediator’s approach would be to]… encourage people to address their concerns and the needs of the business so provoking solutions from within to which staff would naturally feel more supportive and which would be much more likely to be situation specific options rather than alternatives drawn from a management book as to the correct handling of certain circumstances as no one knows a business better that those who are working in it. Deep down they will also know what hard decisions have to be taken too but may lack an appropriate forum in which to articulate them.
[This approach would].. manage concerns and expectations, which at the moment I do not think are even rising to the surface.
Mediation methodology encourages realism and cooperation from the start. For those of you who have been at what we might call a “normal” mediation, when you start exploring options, you are encouraging people not to think “my option, his option,” but to look at a blank piece of paper and think, “What could be done? What’s the possible?” And surely, with a merger and an acquisition, that’s exciting. Encouraging people to work together to come up with that possible I think is more positive and forward-looking and respects rather than undermines the expertise that already exists within the enterprise. As a result even unpleasant decisions may become more palatable as they will be understood in the light of other options…..
Often when people raise objections and barriers down the line it is because this seems to them a better public face for an objection that is more fundamental but which they have not had an opportunity to articulate. Because the barrier they erect is in fact a mask it can prove very difficult to negotiate around it if that underlying issue is not understood. Facilitated debate at the outset may avoid this type of obstruction…
[How] we take our instructions becomes very important… When you are asked to settle litigation you expect to have detailed discussions with your clients. You would expect to address questions such as:
- Why are you going to settle?
- What might be the other party’s interests in settlement?
- What other options do you have?
- What are the “must have” elements of any settlement?
When you do an M&A deal just as much money may be involved, and if it goes wrong the long term implications may be even greater but M&A instructions rarely seem to go much beyond: “What’s the target?” and “What’s the price?” Now this may be a bit harsh but there is clearly a big difference in the approach to taking instructions in these different circumstances.
In the course of actually undertaking the work and in general discussion with the client you may pick up some of the motivators but these may be misleading and are no substitute for taking detailed instructions. I have heard the same deal described by different senior managers within the same company as:
- Necessary to secure manufacture of a key product
- Essential to achieve critical mass in a particular country
- A great opportunity to enter a new market; and
- Critical to ensure the continued employment of the business development department who need to be seen to have done a major deal.
Someone with a mediator’s training might well take instructions in a style much closer to the approach that is familiar ..in litigation.
- Why are you doing this deal?
- Why might the other party, your target, be interested in joining with you as opposed to someone else?
- What other options do you have to achieve your goals?
- What are the essential elements to make this workable?; and only finally,
- What is the indicative price?
Now why does this matter?
If the deal were abandoned, having gone through this exercise, we would have a clear basis for rejection. We had a pre-list of why we were doing the deal; we could see to what extent we had got there. No loss of face. In effect, we have permission to walk away if it doesn’t meet the preset criteria. The decision may be made at an earlier stage. And the idea of walking away then becomes part of a normal process. We are changing the parameters.
If the deal proceeds, then, clearly, you have the comfort that you have explored other options. You have full management buy-in. You have pragmatic and reasoned terms within the deal’s structure because you have thought about it in advance. You have a solid basis to move forward.
Would this eliminate [bad deals]?
Probably not, but I do believe this sort of structured approach would considerably reduce their frequency.”