Introduction
Negotiating an acquisition process is perceived as the amount of time between the manifestation of interest from the part of the buyer and the attainment of the final deal and the agreement of the price paid. This type of negotiation is unique, as it’s a one-time competition between the seller and the buyer and includes a lot of risks for both parties. The acquisition process itself (the courtship) may be related to the ability to make the business combination (the marriage) successful and this ‘courtship’ may be viewed as a process of negotiation (Walsh, 1989), whereby two or more parties attempt to settle what each shall give and take, or perform and receive, in a transaction between them. (Walsh, 1989) Therefore, an understanding of mergers and acquisitions negotiations must include, at minimum, an understanding of the parties themselves and the transaction that ensues between them. (Walsh, 1989)
It is also well known that the nature of a negotiation between two parties affects their subsequent relationship. (Walsh, 1989) A contentious negotiation can strain and shatter a relationship and may also affect the willingness and ability of the top management teams to work together in the new business combination. (Walsh, 1989) So we aim to have friendly negotiations.
We have decided that we want to develop our company through an acquisition and from our research and thorough valuation, we have recognized Denso Manufacturing Midlands Ltd. (hereafter Denso) as being the automotive parts-supplier of particular interest to buy its titles and product lines, as it offers what we exactly need and also it has shown interest to negotiate the sale of the company.
The general environment in West Midlands’ automotive industry is in favour of such a transaction, as competition and market fragmentation have intensified rapidly. Hence, consolidation and rationalisation are needed, which will lead to the emergence of giant global corporations through a series of strategic acquisitions and alliances. (Donnelly et al, 2005) This process is driven by the sole aim of survival through accessing new regions, adopting new production processes and innovatory product development to reap the benefits of economies of scale and scope. (Donnelly et al, 2005).
Toyota, in the neighbouring East Midlands, now sources up to 70% abroad compared to the 70% local content it used to purchase, and as many of these components were sourced previously in the West Midlands, the impact is considerable. (Donnelly et al, 2005). Thus, my motivation is to gain a higher level of commitment from a foreign manufacturing firm, Toyota in this case, to remain in the area (Donnelly et al, 2005) by acquiring an important company from its keiretsu network. I aspire to continue the existing fruitful business relationship with Toyota as one of its crucial final costumers by offering lower costs to it. In particular, we will not buy out the entire assets of Denso, because we need a close collaboration with it after the deal in order to help us integrate to the new environment.
Denso’s main activities extend to the automotive related sector, where it excels in R&D, manufacturing and quality control of automotive parts and has a strong client base. It is clear that both parties want the negotiation process to be the indication of future cooperation and post-acquisition integration.
Therefore, we should prepare before the negotiations in order to obtain a successful outcome. According to Thompson (2009:12), “about 80% of your effort should go toward preparation; 20% should be the actual work involved in the negotiation.”
The assumptions about the seller and the buyer can be seen in table 1.
Table 1: Assumptions
| Seller | Buyer |
| Denso Manufacturing Midlands Ltd | Big German multinational automotive parts-supplier with a wholly owned subsidiary in West Midlands |
| Doesn’t sell at an auction (Has only the choice of one potential and exclusive buyer, so no competition) | Larger share, greater power and influence in the market |
| Has set a deadline of six months to arrange a deal | No professional negotiator
Depends on lawyers and accountants for the interpretation of the legal ramifications of the agreement and for their help during the negotiation The acquisition will be proceeded by buying the assets of the company and not its shares |
The location of the negotiation
Due to the changing structure of production in the region, our company is progressively forced to undergo a radical change and move up the market regarding our procedures and products in order to maintain our cooperation with Jaguar, which is a luxury manufacturer and could easily get many components from competitive firms in UK or from abroad.
Our purpose is not to fail by improving our skills, procedures and R&D capabilities to a higher grade, as well as quality and just-in-time management techniques by acquiring a leading Japanese company that is an expert in these sectors.
I have identified a potential growth for my company after the acquisition of the Japanese entity through the support of the Regional Development Agency (RDA) in West Midlands. Following government guidance, the West Midlands RDA, known as Advantage West Midlands (AWM), attempts to promote economic development through the growth and development industrial clusters and networks as part of a drive to establish knowledge-based, high technology and a high-value-added local economy. (Donnelly et al, 2005).
With this type of cluster, the benefits of multinationals to the host economy and vice versa are great. (Donnelly et al, 2005). And also Toyota will have the opportunity to play a more critical role locally through our company and so our role and function will become more important to it. (Donnelly et al, 2005)
The major problem now is the low rates of innovation due to the region’s component suppliers tending to be smaller than in other major centres of automotive production and more interested in survival than in R&D. (Donnelly et al, 2005)
I will thus attempt to begin the negotiation process with Denso in the offices of AWM, engaging finally the local organization in our negotiation, revealing thus a hidden player that will be to our benefit, as it will push for quick integration. Regarding that this is also an appropriate location due to its neutrality, this ensures that neither of the negotiator participants has an advantage of being on their own ground. (Thompson, 2009) The negotiation will be conducted amongst the top manager of Denso, a manager from AWM and me representing the German company as a top manager. It will be carried out in English as the language of local use and without the use of translators, as each one is proficient in English.
Cultural implications
Problems such as culturally-based misconceptions and unfamiliarity on both sides present a difficulty in business negotiations that can easily be worked out with cultural education. (Katz, 2005) Thus, adequate understanding of the Japanese culture and preparation beforehand so that we are perfectly synchronized are of great importance since negotiations frequently cause misinterpretations due to deficient knowledge about the other party’s culture. Concretely, Japanese are very proud of their heritage and culture; if an outsider demonstrates the slightest relevant knowledge, he will receive great respect from them, since this means he has taken the time to learn a piece of their culture as well as put it into practice. Additionally, this will emphasize good will and serious intentions.
Considering Hofstede’s cultural dimensions and different communication styles, Japan and Germany have obviously quite dissimilar cultural backgrounds. (Table 2)
Table 2: Cultural dimensions
| INDICATOR | JAPAN | GERMANY |
| Power distance | High | Low |
| Collectivism/Individualism | Collectivism | Individualism |
| Communication style | Indirect Communication | Direct Communication |
| Uncertainty avoidance | High | High |
| High/low context culture | High context culture | Low context culture |
Source: LeBaron (2003)
The constant desire to maintain a harmonious atmosphere is one of the Japanese cornerstones of interacting with the surrounding social and working environments. (Katz, 2005) Therefore, the Japanese would rather handle decision-making unanimously and compromise their own view point than have disharmony and imbalance amongst their team members. All decisions have to be agreed upon by all members, regardless of their ranks. (Katz, 2005) As a result of the Japanese preference to preserve consensus and agreement, non-verbal communications become more pronounced cultural barriers that hinder negotiations. (Katz, 2005)
In addition, Japanese have a quite different view of business meetings than Germans. They prefer to elaborate things behind the scenes and they don’t hurry, admire vagueness in communication dealings, whereas Germans consider time as being limited and intend to a deal being made efficiently.
Japanese also prefer to be sincere and have goodwill in order to reach an agreement and they want to continue the relationship after the agreement, as they consider contracts to be only the beginning and are sensitive to emotional feelings. In the Japanese culture, silence is also a way of assessing the situation and seeing whether the negotiation process with the counterpart will encounter future problems in communication and fluidity. (Katz, 2005) “In Japan, as long as you remain silent, you project a favourable impression and are assumed to be thinking deeply about the problem” (Katz, 2005) This desirable quality in Japan is contradictory to the western perception of silence as indicating a lack of knowledge or understanding, as well as signifying a lack of confidence and professionalism. (Katz, 2005)
Furthermore, Japanese place great emphasis on the first impression, as they consider it an essential source of relevant information when examining the business party at the other end of the negotiation room. They will thus utilize all available resources in order to gather relevant information on the business counterpart prior to entering the negotiation room. (Katz, 2005)
First impressions inevitably create lingering effects on both parties, such that many of these impressions, favourable and unfavourable, are found to persist for months and survive intact in spite of numerous conversations. (Katz, 2005)
However, the different cultural dimensions of Japanese don’t always have negative effects on negotiations and therefore can produce the intended result if we deal with them efficiently and taking into consideration that both cultures have the same approach to time, as they focus on one thing at a time. (LeBaron, 2003)
Strategy
Characteristics of the acquisition
It is an unrelated acquisition, in which we are interested in keeping Denso’s managers, as we cannot afford to lose the product and market experience of the target company’s management. (Walsh, 1989) Both companies have similar asset size and function in West Midlands’ cluster, which favours economic and business growth and will confer the unified company a competitive advantage through productivity, innovation, flexibility and business creation.
We have obtained all the information needed about Denso, its results, its market share and products and have determined Denso’s motivating factors about the deal and its general business strategy in UK. The advantages to Toyota in Denso transacting with local car manufacturers like Jaguar are that Denso will have a better picture of the whole automobile industry in UK and will therefore be able to provide it with interesting proposals, as well as will have lower costs (Ahmadjian and Lincoln, 2001), whereas we want to grow further by exploiting Toyota’s capital and technology.
Identify the Issues in the Negotiation
A well-managed pre-acquisition process that will lead to a successful acquisition is of great importance. (Walsh, 1989) Our purpose is to increase our gross revenue and profitability by acquiring Denso’s titles and product lines, enter new markets and expand the market penetration of existing products. We will control both the board of stockholders and the directors and also shape the strategy of the company. Our activities coincide with Denso’s, but in none of the marketplaces the companies have concerted market shares above 15%, while the main competition has shares of 20%. The geographic scope and market of the operations is at least UK, as shipping costs within UK are not substantial, there are no restrictions to trade and prices are alike. We also have our own distribution network that Denso lacks, as it transports its goods and services through car dealers.
Therefore, after possible agreement, the competition with other companies will not be unequal any more and the patent licenses of Denso will be shared with us. The agreement will be reached through goodwill from both parties and will include the transfer of advanced technology, as well as a non-compete article for 5 years after the date of agreement.
Before even starting the negotiation and in order to achieve the ideal acquisition agreement for us, we should consider the main issues that will be discussed. Each of these issues will help us to level the playing field, so we shouldn’t be preoccupied only with the arrangement of the price. The seller is the party that considers invariably the price as a controversial issue and possible deals can easily break, as a result of excessive or extreme conditions set by both parties for price specification. If there is a discrepancy between two parties on the price issue and the appraisal of the business, then it is not likely that negotiators will reach an agreement. Thus, we shouldn’t focus on the price issue, as the seller will not be able to make simply any concessions on it and communication dealing will stop. Each of these issues has a negotiating value and will be of variable priority to our company and if Denso has standard answers to some of these that are non-negotiable, we should focus on offsetting these by profits in other segments. Hence, we should unveil other possibly “hidden” issues that would give us the competitive advantage at the outset of the activity.
* Structure of payment * Future payments for inventory
* Total payment * Management turnover rate
� Immediate payment * Future royalties
� Delayed payment * Plant closings, layoffs & dismissals
* Contingent payments
Source: Walsh (1989)
Multi-issue approach
The first thing we should do prior to the acquisition is to make a thorough review of our company. This should include an evaluation of (1) future plans regarding the scope and size of the company, (2) future product line requirements, including the expansion of existing or development of new product lines, that will need to be filled to accomplish our growth plans, (3) prospects for potential sales revenue and profit growth and (4) personnel and financial resources that will be needed to internally develop and/or acquire new titles and successfully market them. (Rich, 2001)
We should also devote much time of preparation to scrutinize the seller and analyze its assets in order to have a successful agreement and then merge the acquired titles and product facilities into our business.
Having recognized the issues and implemented careful due diligence procedures, we have found that we will not inherit any weak situation.
So, it’s time to negotiate the issues of the acquisition and decide which of them are more important in this process by ranking them according to our preferences, which will enable us to have a clear image of the issues that we will focus on during the negotiation. Table 3 ranks the issues according to my priorities.
Table 3: Ranking of issues
| Rank | Issue |
| 1 | Total payment |
| 2 | Structure of payment |
| 3 | Contingent payments |
| 4 | Immediate payment |
| 5 | Future royalties |
| 6 | Delayed payment |
| 7 | Management turnover rate |
| 8 | Future payments for inventory |
| 9 | Plants closings, layoffs & dismissals |
Source: Walsh (1989)
The major factors that influence the negotiation are the purchase price and the structure of the payment. The agreement could be reached in various ways: a) single payment to Denso b) delayed payout schedule by a payment once the agreement is reached and further fixed sum payments due at a clearly stated period c) future royalties commensurate with our sales of Denso’s acquired products d) payment for Denso’s inventory when we will sell it in the future, if it is not considered as a part of the initial agreement. Most significantly, we should limit the quantity of the immediate payment and agree payments effective in the future according to the company’s performance.
According to its sales, Denso will probably request 2 million pounds, but we have evaluated the company at 1 million. According to the first package, we offer them immediately 100,000 and 400,000 due in five years in the form of annual promissory notes without interest. We could pay the rest of the 1.5 million as 5% of company’s gross revenue over the following five year period. These are the so-called “contingent payments”, which will give us the ability to stop payments in case that the company doesn’t continue to perform according to the demands of the agreement. So, we have established a sunset date for these payments. This is clearly a win-win potential, as Denso will receive exactly the money that it has requested, even in current value, while we pay less amount of money immediately and the rest is a little more than what we had requested, indeed payable in five instalments.
Parties to a negotiation should focus on each other’s interests and offer a single price that is based fairly on objective criteria. (Walsh, 1989) In this way the parties avoid the ‘standard minuet’, that is, starting with an extreme position, stubbornly holding onto it, deceiving the other party as to your true views and making small concession only as necessary to keep the negotiation going. (Walsh, 1989) This ‘standard minuet’ or positional bargaining style is what can strain and sometimes shatter the relationship between the parties. (Walsh, 1989)
The result is that we cause Denso to share the risk with us, which couldn’t be achieved if we focused only on price, while our risk of the company’s failure in a five year period is just 5%. In this way we can make concessions according to the price without suffering substantial cash losses. Thus, we will be able to limit risk not by focusing on a lower price but on the usage of multiple issues and conditions.
The other two packages have the same rationale and equal value to me, while my reservation point in terms of the total payment would be around 2,000,000, whereas the target point would be around 1,500,000. This however varies according to the specified conditions agreed in each case. Table 3 outlines the possible package deals.
Table 3: Possible packages
| Structure | delayed |
| Total payment | 1,850,000 |
| Immediate payment | 500,000 |
| Delayed payment | no |
| Contingent payments | 1,350,000 |
| Future payment for inventory | yes |
| Management turnover rate | low |
| Future royalties | yes |
| Plants closings, layoffs and dismissals | no |
| Structure | delayed |
| Total payment | 2,000,000 |
| Immediate payment | 100,000 |
| Delayed payment | 400,000 |
| Contingent payments | 1,500,000 |
| Future payment for inventory | no |
| Management turnover rate | low |
| Future royalties | yes |
| Plants closings, layoffs & dismissals | no |
| Structure | single |
| Total payment | 1,500,000 |
| Immediate payment | 1,500,000 |
| Delayed payment | no |
| Contingent payments | no |
| Future payment for inventory | yes |
| Management turnover rate | low |
| Future royalties | yes |
| Plants closings, layoffs and dismissals | yes |
Source: Walsh (1989)
The tables above show where my priorities lie and will let me face Denso’s proposals properly. Moreover, Thompson (2009:87) points out that “negotiators who make multiple equivalent offers enjoy more profitable negotiated outcome and are evaluated more favourably by the other party.”
One of the hidden ‘assets’ in many companies is top management. (Walsh, 1989) I will keep the majority of them, as some management continuity is needed to facilitate the continued operation of the company and we cannot afford to lose the unique and perhaps idiosyncratic talents of Denso’s managers in the short term. (Walsh, 1989)
A big number of counter-offers made by us and a protracted period of negotiation will not be seen as evidence of positional bargaining (Walsh, 1989), as Japanese value highly long negotiation processes. In contrary, a protracted amount of time spent in pre-acquisition negotiations may reflect the kinds of pre-acquisition integration planning that have been advocated, rather than contentious bickering. (Walsh, 1989)
Win-win potential
Considering the multi-issue approach and the understanding of each party’s different priorities is a clear indication that this negotiation will have a win-win potential. Having also clear and accurate information about the selling firm’s goals, priorities, and willingness to explore alternatives and requirements, we have a better basis for identifying potential tradeoffs (Clopton, 1984), which will fulfill the expectations of both parties at the end.
Strategy and tactics during the negotiation
It has been estimated that more than half of all mergers and acquisitions fail. (Walsh, 1989) Therefore, we should establish credibility with Denso, develop mutual faith and respectfulness and adopt a direct and straightforward stance of negotiation, which will favour a final agreement. In fact, this open behaviour of negotiation will make apparent the strength that we want to express. However, we will not play any games during the process, as it doesn’t have favourable outcomes and it’s not productive. They are self-perpetuating and normally influence in a negative way all other aspects and the progress of the discussions, making the situation even more complicated.
We should rather focus on achieving our main goal of our negotiating scheme and not be preoccupied with secondary issues, as we want to win the war, not the battles themselves.
Therefore, we should use some factors so that we can have a strategic advantage over Denso, indirectly exerting pressure on it by using all possible leverage points in order to amplify potential gains. It’s about the power of an individual (firm) to place his will to its adversary making it the prevailing one but without degrading the other party. We should demand and exercise control to get the lower price but in a positive way, while obtain and maintain control and dominance of the situation from the first meeting to get momentum. We must also have understanding of the complex psychological factors that prevail in acquisition negotiations and thus could refuse politely some terms proposed by Denso in the beginning in order to show our strength.
Once we have the control of the negotiation, then we can receive the greatest and most important concessions from Denso, whereas the roles are highly difficult to be reversed. We shouldn’t allow our ego to get out of control, but focus on the most important factors about Denso that are of interest to us. In the end we are interested in how profitable our company will be after the acquisition being aware of the future potential and future vulnerabilities and particular liabilities that Denso inherits us.
We have established a realistic but also aggressive potential dealing price, as well as a satisfactory bottom line price.
For Japanese businessmen, engaging in a negotiation process with a foreign company is accompanied by certain traditional “social protocols” that begin long before an actual business meeting occurs, and end long after it has been completed. (Katz, 2005) Generally, showing respect, putting people at ease and showing appreciation are the fundamentals to successful business negotiations. (Katz, 2005) They don’t only act as the basis for sound friendly relations but lay the foundations for a successful business relationship afterwards. (Katz, 2005) Also, the foreign company’s group in general will be put to the test for its internal dynamics among its members, and therefore it is important for us to maintain the team atmosphere.
As Nemawashi is very widespread in Japanese culture and is used before business negotiations, we should adapt it to our strategy. Nemawashi is the groundwork laid unobtrusively in advance. (Davis and Osamu, 2002) Hence, even before the official meeting we should arrange an informal meeting with the appropriate manager to introduce the issue and ask for nemawashi. He will then discuss our request with the top managers who will attend the official meeting in order to gain their unofficial approval. Then the official meeting is held, in which the firm decides to study the issue. Thus, the prearranged meeting is composed of managers, who offer their official approval, facilitating the negotiation process and reducing the delay time.
Conclusion
Taking into consideration that it is difficult for Japanese to make a decision on-the-spot, as they are willing to resort to more talks, delaying thus the final decision and if we don’t reach an agreement quickly, I must be considerably patient but at the same time ready to walk away at any point if important problems are disclosed. We don’t have to cause the deal to occur rapidly, but wait patiently and indeed develop a personal relationship with the vendor, which will contribute to more compromising and flexible behavior when it’s time to reach an agreement in the long run.
As Japanese estimate the value of groups, we should clarify to them that they won’t be excluded from the new company and could also give them little gifts in order to build a firm relationship. We should exploit the fact that the Japanese negotiator considers that buyers are of higher rank than sellers and its desire to build trust, but counter its practice to use middlemen and hide the top manager by suppressing our feelings and force them to do most of the talk, trying not to cause any conflict. He also uses silence as a negotiating tool, as well as non-verbal communication, while he considers meetings more as an opportunity to exchange information rather than reach an agreement via discussion and usually arranges several meetings. Thus, we have to endure adversity and expect the negotiation to result in a win-win situation for both parties.