“How Would Sun Tzu Negotiate on Behalf of a Relatively Weaker Party in a 2-party M&A Deal”

People often think that big, multinational companies have all the leverage in M&A negotiations, while the “weaker” party has significantly less leverage. Well, this is not the case, especially if you ask Sun Tzu. Sun Tzu is famed for his war strategies on how the weaker party in a conflict can actually turn the situation around. In M&A terms, Sun Tzu has listed out his principles on how the weaker side can gain leverage over the stronger side in an M&A deal through the use of advanced strategies on timing, the overall state of affairs in a negotiation deal and the use of offensive and defensive tactics. 

Let’s not forget that it’s normally the “bigger” companies which initiate an M&A with a much smaller company, such as how Tesla merged with Solar City in 2016, and how Johnson & Johnson merged with Auris Health. Smaller companies must always remind themselves that they are approached because of the potential bigger companies see in them, hence the difference in leverage is usually not as big as smaller companies think.

Sun Tzu’s #1 Principle when Negotiating from a “Weaker” position – “Defend using “normal” forces – Get the win using “Surprising” forces”

I’ve translated this phrase from Chinese directly to English, hence it may sound a bit weird, but I’ll try to explain clearly.

In a war, Sun Tzu has always stressed the importance of a “surprise” element – without a surprise element, the chances of winning are significantly less.

What he meant by a “surprise” element is the use of “surprise” forces to attack an enemy who is unprepared for such an attack. At the same time, Sun Tzu understands the importance of having “normal” forces to stave off attacks and defend against the enemy, hence it is the balance that one must strive for between the use of “normal” and “attack” forces to win in a war. Sun Tzu also stresses that wars are always decided through the usage and timing of “surprise” forces, whilst “normal” forces are used to provide favorable conditions for the “surprise” forces to stage a successful, surprise attack.

Psychological Weakness of “Smaller” Companies in an M&A Deal

Our M&A team frequently notices how mentally unprepared, or in worse cases, detect significant mental fragility in the executive level personnel of “smaller” companies in charge of M&A negotiations with their more powerful counterpart.

Our first question we ask them normally, when we notice a fragile mindset, is why they would like to enter into an M&A negotiation if they aren’t mentally prepared? It is often wiser to not enter negotiations until you are at least 80-90% prepared mentally, and in some cases, physically.

We feel that smaller businesses are often mentally weaker is because of the perceived power of their opponent. If I were a big business, I would try all my best to establish psychological leverage before and during M&A negotiations over my opponent, as Sun Tzu would always advocate. The best outcome for any war is to win without any costs.

Therefore, it is the small business’ responsibility to figure out how to prevent their seemingly much more “powerful” opponent from “winning” too easily, or in M&A terms, getting the terms and conditions they want all too easily.

In reality, whether an opponent is powerful or not is just our “perception” to some extent, and relatively smaller businesses involved in M&A negotiations must find out why they are of value to their opponents.

Small businesses involved in M&As should always remember the primary reason why they are M&A targets – that is, larger businesses potentially find it costlier and time consuming to build a business, brand or branch by themselves, compared to if they directly acquire a smaller business that is doing what they wish to do. Hence, small businesses must realize that their more “powerful” opponent has a significant cost to bear if an M&A deal is unreached, and it is their responsibility to find out what the cost is so as to gain leverage in an M&A negotiation.

Getting the Best M&A Deal through the Element of “Surprise”

During the M&A stage, a significant element is obviously “valuation” – how much does a business actually cost at present, and more importantly, in the future.

If a small/medium business owner is currently reading this, you must realize the ways in which you can boost your business’ overall value, especially in the weeks leading up to the valuation. It is hard to make any changes to your “present” value when you are near the valuation stage, since it is near impossible to suddenly generate significant new streams of revenue ahead of the valuation, but what we focus on is how you can pump up your business’ future growth measurements.

How we help clients approach a valuation is by categorizing business assets into 2 categories – a “normal” element, and a “surprise” element. Normally, valuators, auditors and accountants will begin valuation proceedings by assessing your business turnover, cashflow and costs, and they do so through examining your client accounts.

At this stage, you, as the business owner, must realize the significant power you have over the people assessing your worth – what information you will release and when you will release them. Eventually, you will have to release all your information, but we often structure information releases on behalf of clients in a way where we first release 90% of the information required. This 90% will consist entirely of what we initially categorized as “normal” elements, which may include small to medium accounts and some larger accounts. After some time passes, we will release the final 10% of the information, which is entirely consisted of what we call the “surprise” elements – accounts and other info deemed extremely valuable that will significantly boost up the perceived future value of the company.

The “surprise” element does not end here. During M&A negotiations, which are often long and protracted, it is often that the supposedly more “powerful” party makes known their demands first. These initial demands are often based on the initial information received, but remember, our golden rule of M&A negotiations is to only release what we classified as “normal” information first – information that will of course benefit the M&A outcome but will not significantly bring us an advantage during negotiations.

During the middle stage of M&A negotiations, it is then that we would release information deemed “surprising” to our more “powerful” opponent, such as information that our opponent would understand as having significant benefits to their business expansion, which they didn’t foresee ahead of negotiations.

By adding a “surprising” element, it is very likely that the final deal amount agreed will be better than first expected. In Sun Tzu’s terms, the “normal” elements are used to keep the M&A negotiations going positively, while the “surprise” elements are used to actually get a great deal instead of simply a good or mediocre deal.

Sun Tzu’s #2 Principle when Negotiating from a “Weaker” position – “Don’t Overestimate Your Ability to “Wing” it”

People involved in M&A deals may fall into the trap of insufficient planning, such as a startup owner who gets overly excited when given the opportunity of an M&A.

In our experience, more than 75% of M&A opportunities are not good opportunities. By not good, we mean that 75% of initial M&A offers are often not as good as they could be. When faced with an unappealing offer, the worst thing one can do is accept the offer of an M&A negotiation without going into negotiations prepared.

Sun Tzu always stressed 5 major characteristics exhibited by army generals that will lead to a loss, with one of them being overly flexible.

We often overestimate our ability to be flexible. In fact, we often assume that we can somehow “wing it” and get away with things. These things usually include presentations, debates, exams and you guessed it, commercial negotiations.

Sun Tzu stated that army generals who are overly flexible will find themselves unable to change course during a war, since insufficient preparation clouds judgment. In other words, Sun Tzu is warning us that we often overestimate our ability to influence our surroundings in a way that could benefit us. In fact, the Chinese have a saying that “Heroes are born in the right timings, right surroundings and right environments” – the influence we have over our surroundings are very little, especially when business negotiations have gone underway. Sun Tzu says that all wars are won or loss before the battle has started – battles are simply visually playing out the would-be result based on both parties’ initial planning and preparation. The same applies to M&A negotiations.

In fact, I would go as far to say that one should not commence M&A negotiations without at least 4-6 months of planning. An extremely detailed M&A negotiation plan must be mapped out, consisting of all possible negotiation scenarios and actions that your counterparty might take, as well as all possible factors that may influence your counterparty’s decision making, such as the possible valuations of your business, legal and default risks, cost and expenses, potential cash-flow problems and growth opportunities etc. After identifying these, you must also need to think of various ways to frame your offers and counteroffers. The preparation list goes on and on unfortunately, but hey, we are talking about millions and billions of dollars here – don’t expect to get a good deal without putting 110% of your effort into negotiation preparations.

Obviously, when negotiations commence, you must still exercise flexibility to get what you want, but the overall direction of negotiation proceedings shouldn’t go too off-track compared to what you originally expect, otherwise you may need to consider ceasing negotiations.

These are Sun Tzu’s 2 M&A principles that I wish to share with you today, stay tuned to our future blogposts and negotiation videos!