Negotiation Case Studies: Lessons from 10 Major Deals

Introduction to Negotiation Frameworks

Negotiation is the framework upon which business and politics are able to function effectively (Tohm, 2001). There are three primary facets of negotiation that exist in the context of factors such as scale, culture, and relative significance of the market. Those facets — interests, priorities, and strategy — are constant irrespective of the specific negotiation underway. When negotiations function effectively, governments and corporations are able to merge and affect change smoothly without undue disruption to business or the lives of those people directly affected by such changes. When negotiations fail, it is to the inevitable detriment of all parties involved.

There are four primary types of negotiation, defined by the end goal of the strategy (Tohm, 2001). Deal-making negotiations are those related strictly to buying and selling; included therein are mergers such as Pfizer and Warner-Lambert, or even a customer haggling over price with a vendor. Decision-making negotiations occur when there are multiple potential choices with varied outcomes and multiple interested parties. These are most commonly seen in political negotiations or those involving projects backed by multiple stakeholders — at times including governments, such as the Camisea Gas Project. Value-claiming negotiations are used in reaching agreement regarding the proposed distribution of valuable assets. These can become difficult when the production of the asset involves parties with very diverse conceptions of entitlement. Value-creating negotiations are generally more amicable than value-claiming negotiations and represent a collaborative effort between parties to generate more revenue or assets to be shared — such was the case in the creation of the now-defunct NUMMI joint venture by GM and Toyota. Though there are countless interfaces between these general types of negotiation, the overall purposes are generally consistent: the successful achievement of goals either through collaboration, acquisition, or takeover.

In December 1998, two of the largest oil production corporations in the world announced an intended merger. Initially valued at $80 billion USD, this would become the largest merger in United States history ("Exxon, Mobil in $80B deal"). The result of this merger was the equivalent of a U.S.-based small oil-rich country rivaling the production of OPEC nations, coming closely behind Saudi Arabia and Iran in terms of daily oil and gas production as well as access to reserves. The newly formed ExxonMobil Corporation retained both brand names and drew senior executives from each company to develop a new board of directors.

The motivation for the merger was the extreme instability of oil prices and the relative increase in operating costs exacerbated by the 1973 Arab oil embargo and Saudi Arabia's decision not to serve as the regulator of OPEC's production goals. Between 1994 and 2000, there was a great deal of corporate restructuring occurring in the global oil market, ultimately resulting in the formation of several large oil empires that rivaled OPEC member countries in production. Following the merger, ExxonMobil had access to roughly 21 billion barrels of oil and gas reserves — enough to meet global needs for more than one year ("Exxon, Mobil in $80B deal").

The merger was not the result of a desperate financial situation for either corporation. Rather, the two companies complemented each other's global assets advantageously. Following intensive corporate analyses, each company — independently valued in excess of $50 billion USD — decided that merging was both financially responsible and strategically advantageous.

Exxon paid $76.4 billion USD for Mobil, representing more than a 25% market premium, buying all 780 million outstanding shares. The independent stocks of each company reflected a slight loss of confidence in Exxon, indicated by a 70% drop, while confidence in Mobil increased, reflected in a 30% stock rise. Ultimately, as predicted by J.P. Morgan Chase — financial manager of Exxon Corporation — stock interest equalized, and the newly merged corporation was on track to achieve profit neutrality in its first year and a substantial profit the following year ("Exxon, Mobil in $80B deal").

Corporate Mergers and Acquisitions

Exxon and Mobil came together in the face of industry-wide pressure to create a unified front capable of protecting and expanding their interests while maintaining a steady supply of product to customers at a reasonable rate. The merger was conducted amicably, genuinely integrating two highly recognizable brands into one large multifaceted corporation.

Each company realistically evaluated its own assets as well as those that could be gained through merging, and it was deemed not only financially responsible but advantageous to do so. Combined, ExxonMobil holds enough reserves to supply global needs for over one year, while maintaining research into alternate fuel sources and assets throughout the world.

The results of this negotiation also had global consequences on oil pricing. The union of these two powerful companies played an important role in stabilizing oil prices in the United States in the wake of turbulent fluctuations resulting from the nearly unilateral control of OPEC. The companies joined together responsibly and amicably to further the interests of each equally and bring stability to a crucial yet highly volatile market.

The Kraft-Cadbury merger came to fruition in January 2010. Unlike the Exxon-Mobil merger, this transaction was the hostile assimilation of an iconic British confectionery brand by an American confectionery and food production conglomerate. Kraft Foods purchased Cadbury for $19.5 billion, ultimately resulting in Kraft owning over 40 confectionery brands each producing annual sales of over $100 million USD every year (Beaudin, 2010). Though the actual long-term fruits of this negotiation were still yet to be seen, much groundwork had to be laid before any real estimation of success or failure could be gauged. In the aftermath of so hostile a corporate acquisition, it is important to reflect upon the different strategies employed and the places where more amicable decisions might have benefited both companies (Wiggins, 2010).

Cadbury Schweppes had been performing poorly in sales and growth since 2000 (Beaudin, 2010). A succession of senior executives and board members tried tirelessly to rejuvenate a tarnished financial image through bold corporate growth strategies. However, the effects of the American credit crunch left the company vulnerable after it demerged from its soft drinks arm, and the overshadowing of its new Dr. Pepper Snapple Co. stock sales by the Mars-Wrigley merger compounded its difficulties. After these two consecutive blows, Cadbury was a small, manageable independent company in prime position to be taken over (Wiggins, 2010). Irene Rosenfeld of Kraft saw an opportunity to become a behemoth multinational food production giant producing everything from cheese singles to instant coffee — and now Cadbury chocolates.

Ultimately the decision to sell to Kraft was not made by senior executives. Rather, shareholders weighed in and decided by a significant majority that selling to Kraft at a price of 850p per share was the most advisable course (Wiggins, 2010). A factor weighing strongly in this decision was that the shareholder register was composed primarily of hedge funds, many of which were American. Cadbury officials felt that hedge funds were less interested in seeing Cadbury succeed independently than in seeing a significant return on their investment (Beaudin, 2010). Allowing Cadbury to remain independent risked losing not just the Kraft offer — which represented a premium on the existing share price — but potentially any offer at all. Kraft then revised its position after making its offer formal and public, affecting Cadbury's share price, and a prominent Kraft shareholder indicated that unless the offer was altered to reflect a greater cash-to-stock ratio, he would not vote to support the acquisition (the original offer was 40% cash and 60% stock) (Beaudin, 2010).

What makes this acquisition particularly noteworthy is Cadbury's status as a British national treasure and its cultural significance to the UK. The manner in which Kraft, under the direction of Rosenfeld, handled this acquisition was hostile, public, and extremely aggressive. RHR International found that 70% of acquisitions such as this one fail to perform to standard or even expectation (Wiggins, 2010). While Cadbury was initially vulnerable, resulting in this takeover, Kraft had to borrow heavily to afford the final price of 850p per share. In the coming months and years, Kraft would have to balance recovering the cost of the acquisition — a risk many British politicians and citizens feared would mean the end of their signature chocolate brand as Kraft sought to increase its profit margin quickly.

The Kraft acquisition of Cadbury made headlines worldwide both for the magnitude of the deal and the incredible hostility that marked negotiations prior to the final signing. Cadbury wound up in a financially vulnerable position after several strategically bold maneuvers — most notably the poorly received Dr. Pepper Snapple stock offering and its reliance on financing from institutions crippled by the credit crunch — made a sale or merger effectively inevitable.

Irene Rosenfeld of Kraft employed a highly adversarial and aggressive negotiation strategy by taking her initial rejected purchase offer to the press. She knew that the fiercely ethnocentric brand would be unlikely to sell willingly to a food conglomerate, so rather than risk losing to a competitor such as Hershey, Rosenfeld upped the stakes and let the stakeholders decide.

In retrospect, Cadbury blamed its large number of what it termed "short-term" investors for ultimately having to agree to less-than-favorable terms with Kraft. However, Cadbury, despite its status as a British national treasure, had historically attracted little interest from long-term investors, and its stock had shown a poor performance in British markets.

Though Rosenfeld managed to acquire a lucrative, already-branded company, the manner in which she acquired it may ultimately produce a negative corporate outcome for Kraft. The company had to borrow heavily to afford the 850p per share price and might not achieve revenue neutrality in the first year or so of integrated production. She was also warned by both political and corporate stakeholders that if the quality of Cadbury suffers as a result of the acquisition, there will be stiff consequences for both Rosenfeld and Kraft.

Though her negotiation tactics were less negotiating and more strong-arming, the results ultimately turned in favor of the direct and persistent approach. However, the extremely unpleasant nature of the acquisition will make the transition into Kraft even more difficult. It is important even in the most highly charged negotiations to remember that even if an individual or company is currently an adversary, they will likely be a colleague tomorrow.

Mannesmann and Vodafone are both telecommunications giants. Though independent, the two corporations worked together in Europe for years, partnering successfully to bring service to millions of customers across the continent. The two companies jointly owned Germany's largest mobile phone service provider as well as Italy's second most popular firm. The trigger for Europe's largest corporate buyout at the time (£112 billion) was Mannesmann's acquisition of Orange — the third largest UK service provider — for £36 billion ("Mannesmann seals deal"). Though the two giants had worked together successfully for years, this corporate takeover was still hostile in nature. Mannesmann was not looking to sell; however, the purchase of Orange left the company somewhat vulnerable, at which point Chris Gent of Vodafone presented an initial offer of a merger.

Officially the corporations were merging, but more than half of the new company would be owned by Vodafone while 49.5% would belong to Mannesmann (Watkins, 1999). The less-than-50/50 split held up negotiations for several months. Initially Vodafone presented an offer that would give Mannesmann shareholders only 47% of the merged company; Esser, chairman of Mannesmann, initially wanted to hold out for 58.5% (Watkins, 1999). Vodafone, as the acquiring agent, was definitely not going to cede controlling share to the asset it was acquiring. During the tense and at times hostile negotiations, the share price for Mannesmann spiked 119%. Unfortunately, as the end of the 60-day negotiation period drew to a close, it was evident that Esser would have to negotiate the best possible terms for what had become an inevitable acquisition ("Mannesmann seals deal"). There was strong evidence that had the vote gone to shareholders, they would have accepted the deal even at a lower percentage share in the new merged corporation.

Though the bid to acquire Mannesmann was initially presented as a "friendly" offer, when Mannesmann turned it down immediately, Chris Gent began a campaign to acquire the German telecom giant. Gent and Esser began campaigning throughout Europe and even the United States, attempting to win the votes of shareholders either for or against the merger ("Mannesmann seals deal"). This tête-à-tête, which lasted three months, ultimately produced a telecom multinational that boasted 31 million customers in Europe and 42 million customers in total. Though Esser ultimately acquiesced to the Vodafone bid, he remained as a non-executive deputy chair of the new merged corporation. Chris Gent, for successfully acquiring the reluctant Mannesmann and reducing costs by £500 million reportedly without cutting any jobs, became chairman of the new merged company ("Mannesmann seals deal").

This case study is an interesting example of the use of lobbying in a corporate negotiation context. This negotiation, undertaken for the purposes of value creation, was ultimately quite hostile. Both Vodafone and Mannesmann were highly successful companies in their own right. This takeover was predatory in that Gent of Vodafone waited until Esser made Mannesmann slightly vulnerable by purchasing Orange, a UK-based telecoms company.

The impetus for this hostile takeover was Mannesmann's decision to purchase Orange, the UK's third largest network. Though the two companies had worked together successfully in Germany and Italy, there was an unspoken agreement that Vodafone had dominance in the UK while Mannesmann had dominance in continental Europe, though both sought expansion into the American market.

Gent, skilled in corporate strategy and negotiation, initially presented the offer as an amicable merger. When Esser refused outright, it became clear that refusal was not something Gent was willing to accept. Though there was a breakdown in direct negotiations at that point — not to resume until days before the bid would be put to a stakeholder vote — both chairmen began a rigorous campaign to entice stakeholders on both sides to vote either for or against the acquisition. Effectively, each chairman sought to shape the stakeholders' decision by using accumulated potential votes as bargaining chips in the ongoing negotiation.

Eventually, despite the huge spike in Mannesmann's share price (119% during the final days of negotiation), Esser recognized that if put to a vote, stakeholders would accept the existing offer. He immediately reinitiated negotiations in the hopes of securing as close to equal share in the new enlarged company as possible. He succeeded — with the deadline less than 72 hours away — in securing 49.5% market share for his stockholders, a feat which Gent publicly praised.

This case study is an example of extremely creative negotiating tactics. Generally, in situations such as this one, the politics of internal structure become the primary focus of debate. However, both men realized that the ultimate decision would likely come down to a vote, and as such each needed as many votes as he could secure. This innovative strategy ultimately resulted in an effective and profitable solution for both companies.

The J.P. Morgan Chase–Bank One merger is a strategic alliance of two similar banking entities. Both extremely strong in terms of assets and market presence, their merger was handled equitably and efficiently. The combination of the two banks — each representing a large market share and a diverse range of financial products — would ultimately return greater profits for shareholders while reducing the relative cost of operations and products.

An increase in per-share dividends of up to $0.45 per share was possible as a result of this merger. However, so too was the loss of 10,000 jobs throughout more than 2,000 branches worldwide ("$58B bank deal set.."). J.P. Morgan Chase was already the second largest banking and financial institution in the United States before the merger, with stocks performing well due to the extensive range of products offered and its strong presence in diverse markets.

Headquartered in New York, J.P. Morgan Chase had a strong international presence as well as throughout all U.S. states. However, in the Midwest and Southwest, that presence was based largely on investment banking and trading. The Chicago-based Bank One had a strong retail and credit card history that would enhance the J.P. Morgan Chase portfolio. Furthermore, J.P. Morgan Chase acquired through this deal the world's leading issuer of Visa cards, according to 2004 estimates ("$58B bank deal set..").

The running of this new financial corporation was designed to be a fairly egalitarian process. A sixteen-member board would be composed of seven executive board members from each company, each representing a specific area of the corporation's business ranging from securities to technology. The final two members would be the two chairmen who drove the deal. William Harrison, existing Chairman and CEO of J.P. Morgan Chase, would serve as Chairman and CEO, while Jamie Dimon would act as President and COO. This arrangement would see the company through its first two years as a combined entity before Harrison stepped down as CEO, succeeded by Dimon ("$58B bank deal set..").

According to the terms of the deal, J.P. Morgan Chase would trade 1.32 shares of its stock for every 1 share of Bank One stock, resulting in a price tag of $58 billion USD for all 1.12 billion outstanding shares. The merger was also projected to save approximately $2.2 billion USD while costing an estimated $3 billion USD. While initially an expense, the combination of the two companies was expected to generate increased cash flow from the start, with profit increases expected within the year ("$58B bank deal set..").

This case is an example of an amicable and highly profitable value-creating negotiation strategy. Each party had complementary interests and was of generally equivalent size and value. Though mergers among equals tend to involve a great deal of difficulty, the extremely lucrative and beneficial nature of this proposition made the transition much smoother than, say, the acquisition of Cadbury by Kraft.

Both chairmen of the two companies sought this arrangement mutually. Where J.P. Morgan Chase could provide access to a larger world market, Bank One was the leading distributor of Visa Cards worldwide — an invaluable asset in light of the financial environment at the time. Though Bank One was ultimately merged into J.P. Morgan Chase, the integration of the two institutions was quite seamless. Key positions in J.P. Morgan Chase were given to Bank One executives, and though the merged company was initially run by the Chairman and CEO of J.P. Morgan Chase, within two years he was to step down, succeeded by the former chairman of Bank One.

The most significant lesson to be learned from this negotiation is that amicable, high-level corporate negotiation is possible. Opportunities for value creation should be carefully assessed, and in instances where both companies would profit equally, they should be pursued. It is only because each company was so internally aware and efficiently organized that this merger was able to move so smoothly and swiftly.

This merger resulted in one of the fastest-growing and most successful pharmaceutical companies in the world ("Pfizer and Warner-Lambert agree to $90 Billion merger..."). It stemmed from the extremely successful joint venture of both companies on Lipitor products. The merger resulted in the total absorption of Warner-Lambert by Pfizer; however, eight senior executives from Warner-Lambert were invited to join the Pfizer board. The merger was formally completed with Pfizer trading 2.75 shares of its stock for each outstanding share of Warner-Lambert stock. The case is of particular interest because Warner-Lambert was already involved in merger negotiations with American Home Products at the time (Koo, 2000).

Pfizer initially made a bid for Warner-Lambert of 2.5 shares, which was rejected in 1998. However, the 1999 offer of 2.75 shares was far greater than American Home Products' offer of 1.49 shares (Koo, 2000). Because talks had already begun and cross-options were actively in negotiation for the AHP merger, a fee of $1.8 billion was offered to the company outbid by Pfizer. Though that firm would receive a one-time severance fee, none of the additional cross-options were being considered. Negotiations between the two firms had been growing tense, and the Chairman and CEO of American Home Products made no attempt to prevent the completion of a new merger with Pfizer ("Pfizer and Warner-Lambert agree to $90 Billion merger...").

Though the merger made a great deal of strategic sense, analysts were particularly positive because Pfizer would be assuming operational control of Warner-Lambert. Another reason analysts were heavily in favor of the merger is that it was not considered a merger between equals (Koo, 2000). In instances where two companies come together on equal footing, resolving internal politics tends to consume the majority of time and effort in the first months of joint operations. In this case it was clear that Pfizer was absorbing the slightly smaller Warner-Lambert. Mr. de Vink, CEO of Warner-Lambert, also chose not to continue in a leadership position in the new company (Koo, 2000).

Though both companies were well positioned in the market and each had significant projected growth above 20%, the merger would represent an incredible amount of both cost savings and net income increase. Analysts predicted $1.6 billion USD in cost savings and efficiency gains, as well as growth of as much as 25% in annual earnings ("Pfizer and Warner-Lambert agree to $90 Billion merger..."). Pfizer would also gain control of Lipitor, which was slated to debut in Japan in the spring of 2000. The already-$5 billion USD per year generated by that drug alone would represent a significant increase in Pfizer's income.

This influx of capital from both cost savings and an increased range of diverse products presented a number of promising changes for Pfizer. The increase in cash flow made possible the expansion of key departments, with plans to grow research and development in areas such as Central Nervous System disorders, Infectious Diseases, and Women's Health. These changes were ultimately expected to return an average of 20% compounded growth per year for at least the first two years following the transaction ("Pfizer and Warner-Lambert agree to $90 Billion merger...").

Calling the acquisition of Warner-Lambert by Pfizer a "merger" is slightly misleading. Though the negotiations were amicable, the two companies did not merge as equals. Warner-Lambert was absorbed — made effectively an integrated part of the Pfizer family. Little of the smaller company's internal structure remained intact after the deal was signed and Mr. de Vink stepped down as CEO and president of the organization.

Effectively, this acquisition was the result of a value-claiming negotiation. The two companies had collaborated on the extremely successful Lipitor product. However, as supported by the analyses of financial experts, Warner-Lambert's internal corporate structure was not ideal for capitalizing on and growing such a product or partnership. Though Warner-Lambert was in talks with American Home Products at the time, Pfizer effectively doubled that firm's offer. Though $1.8 billion USD was lost as a result of walking away from the earlier deal, Pfizer stood to increase net profit by a margin of 25% as a result of the "merger."

Pfizer began showing interest in acquiring Warner-Lambert a full year before the deal was actually signed. However, the impetus of a competing bid and the impending release of Lipitor in Japan motivated Pfizer executives to make a hard bid. Though they paid a market premium for Warner-Lambert's stock, the excess capital generated would be enough to ensure no losses were felt by Pfizer stakeholders and that increased funds would be available for highly lucrative areas of research and development.

The strategy used by Pfizer with great success was one of evaluating the relative strengths and weaknesses of their partner and using that information to bargain effectively with the executive board and shareholders of the desired company. Pfizer could offer increased profit immediately as well as huge potential profits from increased research, and it offered a market premium. Ultimately, the careful financial and structural analysis of Warner-Lambert allowed Pfizer to step in — at the moment of a hugely important product launch — and present Warner-Lambert with an offer it could not refuse.

Conclusion and Lessons Learned

Though the cases discussed above are extremely diverse, each represents an example of two or more parties coming together for the purposes of decision-making — an extreme simplification, yet the most accurate and succinct explanation of what negotiation actually is. The primary lessons learned from cases such as the ones above are the same lessons learned from everyday human interaction: respect for others and other cultures is paramount, attempting to circumvent the rules will be met with punitive actions, and perhaps most significantly, hostility will always be less effective in the long term than congeniality.