Negotiating the risk or risky negotiations?

• Author: Ertel, Danny
• Position: DEALS & DEALMAKERS

Economic downturns make the ordinary challenges of negotiating deals that actually deliver value much more difficult. Business development teams feel increased pressure to close the deal since they worry about missing out on a "deal of a lifetime" as companies that never expected to be in play are suddenly not just up for sale, but aggressively shopping themselves on fire-sale terms.

As such, the demands to move quickly and take on some risk for potentially very high rewards can be hard to resist.

The market has recently seen some excellent deals. Warren Buffett, for example, has picked up some great assets under terms even better than the U.S. Treasury. He's done so while providing much needed support to mainstays of the United States economy, such as Goldman Sachs Group and General Electric Co. Simply deciding to sit on the sidelines because there is too much risk can be extremely expensive in the long term.

At the same time, however, cash and credit are as tight as they have been in recent memory. Deals that depended on the magic of cheap leverage to deliver a reasonable return can no longer get funded. Thus, when you find a deal worth doing, it really has to work.

Indeed, in today's environment, risk analysis is no longer just a question of challenging whether the integration team can deliver the savings, but whether a flawed deal can bring down the entire organization.

Bank of America Corp.'s rushed acquisition of Merrill Lynch & Co. Inc. has been plagued by a departure of key Merrill staff, a major culture clash between the companies, monumental losses and a host of lawsuits. Meanwhile, B of A has seen its share price fall some 80 percent since the deal was announced.

The Negotiating Table

For most deals, the value comes with implementation, not just in getting the deal signed. The parties typically have to rely on each other to do something after they say "yes"--follow through with action, exercise some degree of judgment, apply some degree of skill or even take steps not fully spelled out in the contract. Yet, unfortunately, many of the things that negotiators do at the table to try to close the deal work against the parties when it comes time to implement.

Dealmakers who focus on getting the contract signed, for example, tend to try to keep the number of people "in the know" as small as possible and to exclude naysayers who might get in the way. They tend to limit the disclosure of information to what is strictly required and try hard to maintain the momentum of the deal, lest attentions wander or circumstances change.

But when implementation matters and the deal is a means...