Deal Process Design: Auctions,

Negotiations, & Negotiauctions

Guhan Subramanian
Douglas Weaver Professor of Business Law, Harvard Business School
Joseph Flom Professor of Law & Business, Harvard Law School

June 2010

Copyright President & Fellows of Harvard College.

A Typical RFP Process

SUPPLIER must use the prescribed format to submit its
proposal. Any deviation from the format or requirements stated
in the RFP and associated documents may render SUPPLIERs
proposal invalid.
SUPPLIER must accept, without exception, all of CLIENTs
standard terms and conditions of contract set forth in this RFP
and to price its proposal accordingly. Failure to do so (for risk,
liability or any other reason) may result in removal of SUPPLIER
from the RFP process.
Any element of the SUPPLIERs proposal that is subject to or
alludes to being contingent upon further discussion or
clarification with CLIENT, or review, consent or further approval
from any person, group, committee, board or other authority of
the SUPPLIER, may be rejected.

Auction or Negotiate?
The BASC Framework
Auction

Negotiation
Large number of potential buyers

Bidder
Profile

Bidders well-known
Bidders have good BATNAs
Large difference in valuations
Asset is well-specified

Asset
Characteristics

Large value-creation potential

Relationship/service important

Source: Subramanian, Negotiation? Auction/ A Deal Makers Guide, Harvard Business Review (Dec.2009)

Auction or Negotiate?
The BASC Framework (cont)
Auction

Negotiation

Speed important

Seller Profile
Low tolerance for risk

Contextual
Factors

Secrecy important
Transparency important

Source: Subramanian, Negotiation? Auction/ A Deal Makers Guide, Harvard Business Review (Dec.2009)

Negotiauction Deal Processes

= source of competitive pressure

Negotiation

Auction

Negotiauction
Buyer

Seller

Buyer

Seller

Buyer

Buyer

Buyer

Seller

Buyer

Buyer

Source: Subramanian, Negotiauctions: New Dealmaking Strategies for a Competitive Marketplace (Norton 2010).

How Not to Play in

Negotiauctions: RJR Nabisco Case Study
Were not done!, Goldstone insisted. Peter, were willing to
bid more. Well bid more! What is this nonsense about
starting an auction and shutting it down an hour later? There
are no rules governing these procedures. We put in a bid
saying well bid more, and we will. How can you do this? Its
not fair!
Atkins tried to calm the feverish lawyer but got nowhere.
Peter youve got to keep the bidding open. Youve got to
keep the bidding open as long as people are willing to bid.

Source: Burrough & Helyar, Barbarians at the Gate, p.462.

How to Play in Negotiauctions:

Three Categories of Moves
Setup Moves: establishes the terms of entry
into a negotiation or auction situation
Rearranging Moves: reconfigures the assets or
the parties, or both, in ways that create
additional value
Shut-Down Moves: cuts off same-side-of-thetable competition in a negotiauction that is
underway
Source: Subramanian, Negotiauctions: New Dealmaking Strategies for a Competitive Marketplace (Norton 2010).

Setup Moves: Marthas

Vineyard House Purchase Case Study
Captains Cove Waterfront Jewel. In a waterfront setting of
idyllic peace and beauty this brilliant contemporary commands a
sweeping vista of Sengekontecket to Vineyard Sound. Entering
the tiled foyer through to the fireplaced living room with walls of
glass and bleached oak floors, your breath will be taken away by
the light-filled splendor. A superb kitchen, separate dining area,
large master bedroom with bath and a beautiful view complete
the first floor. Ascend the staircase to find an ideal office area
framed by a bookcased balcony, a second master suite with view,
two additional bedrooms and bath. Custom details abound. This
jewel has been professionally sited on a beautifully landscaped
lot with terraces and mature gardens. Two car garage, three and
a half baths total, Association tennis, saltwater access, direct
path to wildlife sanctuary. $1,390,000.

Marthas Vineyard: Chronology of Events

June 12th: Robert & Sally Franklin bid $1.28 million + several conditions.
June 13th: Seller responds: No! We have another full, unconditional offer for
$1.39 million. Bid again. Deadline: 3:00 pm, June 15th.
June 15, 2:30 pm: Robert and Sally decide to bid in $1.48-1.5mm range.
Sally: Our wedding anniversary is on August 4, or 8/4, hence we should bid
$1.484 million.
June 15, 3:00 pm: No response
June 15, 4:00 pm: Still no response. Robert calls his broker: Whats going
on?
June 15, 5:00 pm: Broker: May be a problem with others bid, possibly in
form of $x higher than competing bid. After 1.5 hours, Im still on the phone,
trying to learn more.
June 15, 10:00 pm: Robert speaks with sellers attorney, who eventually
offers a re-do. Bids due at 10:00 am next morning.

Marthas Vineyard: The Denouement

June 16, 10:00 am: Franklins bid $1.484 million
again
10:05 am: Bid is accepted!

10:06 am: Competing bid was $1.475 million.

10:45:00 am: Phone rings. Other bidder: Will you
take $1.5 million?
10:45:23 am: No deal!

Rearranging Moves: Toys R Us Case Study

In March 2005, the Toys R Us board decides to sell the company.
CSFB contacts 29 financial buyers. Nine make preliminary bids, and
eventually the field is narrowed to four: Cerberus club (joined by six
others); Apollo club (joined by one other); KKR; and Bain/Vornado
club.
In best and final round, KKR agrees to bid only if it can club with
Bain/Vornado.
Q: What do you do as the Toys R Us board?
Toys board agrees to let KKR team with Bain/Vornado.
Final bids come in: Apollo club bids $24-26 per share conditional on
further due diligence; Cerberus bids $25.25; KKR club bid $26.75.

Shut-Down Moves:
Car Purchase Case Study
MSRP of $57,975; dealer invoice price of $54,615 according to
Edmunds.com.
Salesperson begins by showing invoices for purchases above
MSRP.
First serious offer from salesperson of $57,975
Talks to manager, comes back with best and final offer of
$55,885
Finally comes down to absolute best I can do of $55,350.
Customer: OK; thanks very much for your time. Let me talk to
my wife and I will get back to you tomorrow.
Salesperson: Why dont you call her now? I can wait.
Customer: She is a very busy money manager. We dont
bother each other during the day unless time-critical.
Salesperson: What would it take for you to sign the papers
right now, without talking to your wife?
Customer: $55,000
Salesperson (after consulting with manager): Deal.

Summary & Take-Aways

As process-setter: Determine what kind of deal process to
use using the BASC framework. (Dont succumb to the
conventional wisdom than an auction is always the best way
to sell an asset, and educate your counterparties
accordingly.)
As process-taker: In complex negotiauction situations, use
setup moves (e.g., Marthas Vineyard), rearranging moves
(e.g., Toys R Us, Carville-Matalin book deal, Charity
Auction), and shut-down moves (e.g., Car Purchase) to
shape the game to your advantage.
In general: Process and substance are negotiated
simultaneously be vigilant for opportunities to achieve
substantive advantages through advantageous process.