Master Plan for Merger Negotiations

Master plan for Merger Negotiations

Harvard Business Review     
Jan - Feb 1970
By Gary E. MacDougal and Fred V. Malek



Analytical approach enables a potential buyer to stand apart from the crowd and to give its offer a real competitive edge.




 Two common obstacles have prevented many an acquisition from being successfully negotiated. One is inability to settle on a realistic price. The other is failure to “sell the seller” on the nonfinancial aspects of the merger. But, say these authors, these snags can be overcome: “By first analyzing, and then graphically portraying, the key relationships of various financial alternatives, management should be able to grasp the trade-offs involved and the limitations of various price levels and terms. This approach, combined with a solid plan for the growth of the combined businesses, should result in a deal."

Mr. MacDougal has been a Partner in McKinsey & Company’s Los Angeles office, where he was extensively involved in merger and acquisition work. Recently, he became Chairman of the Board and Chief Executive Officer of Clayton Mark & Company, a manufacturer of specialized industrial products. Mr. Malek is currently the Deputy Undersecretary of the Department of Health, Education, and Welfare. Previously, he was co-chief executive officer of Triangle Corporation, a manufacturer of hardware supplies, and associated with McKinsey & Company, specializing in mergers and acquisitions.

Mergers and acquisitions still moon large in most companies’ strategic growth plans. The pressures to acquire—whether to improve earnings growth and stability through diversification or to ward off possible take-overs—preoccupy chief executives as well as staff planners. Very often, these pressures demand large amounts of presidential time.

If the top executive’s background happens to be in corporate finance, this may be time well spent. But more often he will have come up through the sales or manufacturing ranks perhaps with a tour of duty as a division manager.

Such cases, when the chief executive is not well prepared by experience for his vital role in acquisition analysis and negotiations,and negotiations, often follow a familiar pattern. Much effort goes into screening long lists of industries and companies, and into gathering published data on possible acquisition candidates, but not enough thought is given to developing an analytical approach to merger negotiations that can be understood and communicated effectively.

Two kinds of consequences may result: (a) through failure to “sell the seller” on some aspect of the acquisition, management may find itself unable to “close” or complete anything of substance. Or, worse yet, (b) faulty financial analysis may lead management to acquire a poor company, or to pay so much for a good one that it cannot hope to earn an acceptable return on the investment.

The approach to acquisition negotiations outlined in this article is designed to enhance the chances of success in merger negotiations. It shows negotiating executives, too often perplexed by the maze of technical, legal, and financial details surrounding a prospective acquisition, how to handle three critical aspects of the negotiating process:

1. Laying the groundwork by understanding the financial relationships that underlie any agreement between the two companies.
2. Developing the seller’s interest in the non-financial aspects of the proposition.
3. Resolving the financial facts in a way that will make possible an early and realistic agreement on terms.