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The Art of Negotiation Managing Relationships and the Perception of Leverage to Create Lasting Agreements

AMBASSADOR MICHAEL DESOMBRE

The Art of Negotiation

Managing Relationships and the Perception of Leverage to Create Lasting Agreements

Author Ambassador Michael George DeSombre

 

Introduction

To succeed in any negotiation, I advise clients to be soft on the people but hard on the issues.  Focus on building the relationship with your counterparty but take hardline positions on issues. Doing both simultaneously will maximize your leverage. This was my conclusion after two decades leading the mergers & acquisitions (M&A) practice in Asia for the global law firm of Sullivan & Cromwell. I brought that understanding with me when I was appointed as the United States Ambassador to the Kingdom of Thailand, where my experience confirmed it is equally true in many diplomatic negotiations.

It was a pleasant surprise when strategies I had developed to help clients achieve successful outcomes and lasting agreements in M&A transactions were just as applicable in government-to-government negotiations. These types of negotiations share two primary attributes: First, the substance of the negotiations are important to the parties, and second, the parties will need to work together after the agreement, pursuant to the terms, for an extended period of time.

In any major negotiation with the above two attributes, you must focus on building the relationship with the counterparty. If the counterparty dislikes you, it typically will be less likely to reach an agreement that is favorable to you. However, if the counterparty enjoys a relationship with you, both on and off the negotiation table, you will be more likely to reach an agreement with favorable terms. This sounds like common sense – and it is. But surprisingly, many parties do not fully use this basic quality of human nature to their advantage in negotiations.

Negotiations at some point always come down to a zero sum game – one party will need to give something up that it does not want to give up in order for the negotiation to be concluded.   This means the parties always need to battle some substantial issues and would be helped by maximizing their leverage. The critical element is the perception of leverage, not the actual leverage. Leverage here is the power to influence the terms of the transaction. In extreme circumstances, substantial leverage is created by a party being the only buyer or only seller of a product and thus possessing a strong ability to influence the terms of the transaction. In cases with multiple potential parties to a transaction, overall leverage often is determined by parties’ eagerness to enter into the deal, with the most eager party having the least leverage! But because one party’s degree of eagerness to enter into an agreement is not objectively knowable by a counterparty, the key is the counterparty’s perception of the other party’s eagerness. Once you recognize that the perception of leverage is what matters, you then can strategize on how to manage and influence that in your counterparty.  

The end goal of any negotiation is to create a lasting agreement. In my experience, the strongest and longest-lasting agreements have been the most time-consuming and challenging to finalize. If one or both parties feel they could have gotten more in the agreement, that agreement will be shakier and might not last. If the parties feel that the agreement reflects the best deal they can get, the satisfaction on both sides will help to create a stable agreement and to forge a lasting relationship.

Relationships, perceptions of leverage, and creating lasting agreements. I will turn to each of these in more detail and provide some concrete lessons and negotiation strategies for both corporate leaders and diplomats.

Building Relationships

In all of my initial meetings with Thai government officials, I explained that I wanted them to view me, the U.S. Embassy and the entire U.S. government as their partner in the economic development of Thailand. I continued to emphasize that I wanted to develop a positive Thai-U.S. relationship, and I used every opportunity to be the first to contribute toward the relationship — whether it be to assist proactively with issues raised by the Thai government or to host a get-together for drinks, a dinner, or a round of golf. Then, later, when I would need to ask something of the Thai government, I would not be seen as someone who only asks for (or worse yet, demands) things. My quick start on relationship-building paid significant dividends in various negotiations we had with the Thai government.

One way to follow my advice of being soft on people but hard on issues is to ensure that external counsel leads the negotiation on the hard issues while the client spends significant time on relationship-building (dinners, drinks, golf, etc.) with the counterparty. It is always better for external counsel, rather than the client or its internal counsel to be adamant on relevant issues. If it becomes apparent that the external lawyer has taken a position that causes undue strain in the negotiation, the client has an “out” by indicating that it did not intend for the external counsel to take such a harsh position. While relationship-building should be the focus of the client, it doesn’t hurt for external counsel to inject a certain degree of levity into all negotiations and ensure time is reserved for dinner and drinks with counterparties and their advisors in the middle of negotiations. 

My client once managed to “steal” a transaction from a counterparty over a weekend, due in part to some late night relationship-building. The seller had almost completed an agreement to sell its business to my client’s competitor. The competitor flew out on Thursday to seek final board approval, assuming the agreement would be signed the following week. My client and the seller began discussions that Thursday evening, and then my client and I flew in on Friday afternoon and promptly started negotiating with the seller. After about six hours we broke for dinner and drinks until midnight. We returned to the negotiation table and clinched the deal around 5 a.m. We all enjoyed our time together, and the positive relationship between the parties was critical to the seller’s willingness to sign a deal with us quickly without giving the competitor a chance to match.

Companies in Asia more frequently appreciate the importance of relationship-building as part of negotiation. A negotiation session in Asia that does not include dinner and drinking (and usually some singing) afterward is a rarity. I always encourage my clients to participate in these events and, if possible, to organize a small private dinner for the top decision makers of each party and then another dinner for the larger working groups of the two parties. A lively dinner and time together singing “My Way” does not guarantee the other side will accept all of your proposed revisions to an agreement, but shared fun times are always valuable when finalizing terms.

Note, though, that relationships cannot be built effectively over video calls. Video calls do allow you to get to know someone better than phone, but they are no substitute for in-person meetings and relationship-building. Once a solid relationship exists, video calls can be useful in maintaining that relationship until the next meeting.

Managing Perceptions of Leverage

In the late 1700s, the various states of northern Africa, generally referred to as the Barbary States, regularly captured United States merchant sailors for ransom. The United States did not have an effective navy at that time, so was perceived to have no leverage in negotiations with the Barbary States. The Naval Act of 1794 allocated funding and directed the building of an initial six frigates which were completed by the turn of the century. In early 1801 President Thomas Jefferson dispatched a squadron of naval vessels to blockade the coast of Tripoli and Libya radically changing the perception of that leverage to the extreme benefit of United States sailors. I tell this story at the beginning of my negotiation training sessions to illustrate the extreme importance of leverage in any negotiation.

In the commercial world, a public, live, in-person auction is the purest example of how to manage the perception of leverage. There is one seller and many potential buyers all bidding publicly against one other. Every potential buyer perceives clearly that the seller has options and no particular eagerness or incentive to sell to any specific buyer. The seller only wants to sell to the bidder offering the highest price, so each potential buyer is motivated to declare a high starting bid and to keep raising if others are bidding. 

But what about an auction in which all of the buyers are in different rooms, and the bidding takes place over weeks and months and involves different terms in addition to price? That is essentially how auction processes work when companies are for sale, which means companies must focus on how their actions during the process will influence potential buyers’ perception of the seller’s leverage.

I advise companies that “everything is part of the negotiation.” Every action and decision needs to be examined in light of how it could affect the potential buyer’s perception of the company’s leverage. Potential buyers typically are asked to sign a confidentiality agreement to access certain information from the company they are considering for purchase. Most prospective buyers will propose revisions to the form of the confidentiality agreement provided by the company before agreeing to it. If a company has dozens of prospective buyers that accepted the form without revisions, the company has little incentive to accept changes to its form of confidentiality agreement. Thus, the selling company has strong leverage, because it has no particular eagerness to enter into any specific deal with a certain potential buyer — but each potential buyer does not know this, so there is no perceived increase in leverage. To ensure potential buyers perceive the selling company has many options, the company can refuse to negotiate small revisions to its confidentiality agreement. This refusal to negotiate even reasonable comments conveys to each potential buyer that its participation is not that important to the company and thus giving the impression that there are many potential buyers, no matter whether there actually are. 

There are three reasons sellers often do not disclose the number of other potential buyers. First, in most negotiations there is no inherent obligation to provide full and complete information at all times. Second, if a party does provide information, it generally has to be truthful. (Otherwise it is fraud!) Third, the number of potential buyers in these situations is never too large and often dwindles to only a few near the end. Well-advised companies therefore do not want to declare a high number of potential buyers involved and then later need to admit (or are otherwise perceived as evasive) the number of potential buyers has dwindled substantially. Selling companies tend to stick to vague statements like, “We are very pleased with the response from potential buyers,” though even this response is problematic if only one potential buyer is involved.  

When the buyer perceives it is the only buyer remaining, leverage can shift dramatically from the seller to the buyer. A potential buyer often will try to force an admission that it is the only potential buyer remaining by requiring the seller to enter into an exclusivity agreement before final negotiations. Exclusivity agreements prohibit sellers from negotiating with other potential buyers for a period of time. Sellers can avoid swings in leverage by continuing at least two simultaneous negotiations until the very end, but this does split the focus of the company’s management and multiply the cost of external advisors.

Time is another significant element in the perception of leverage. In particular, a party will perceive its leverage is higher if it believes the other party is in a hurry, so parties must avoid conveying they are under pressure to complete a negotiation in a set amount of time. I advise clients to convey the impression that they are in no hurry at all. In this age of rapid-fire email exchanges, merely delaying a response to an important email for a day or two is an effective way to communicate that you are not in a hurry or that you may be busy working with other potential buyers. These sorts of delays can be particularly successful in gauging how eager the other party is and thus how much leverage you have. If you delay a few days in responding and the other party presses for a response, that indicates the other party is eager to finalize a deal, and you have more leverage than you might have thought.

This worked for me personally during the dot-com boom. I had registered a domain name under an email address that I then stopped using. I later learned an up-and-coming dot-com company had been emailing me at my defunct email address seeking to buy the domain name.  The company did not understand why I was ignoring the emails and finally managed to locate another email address for me. Company officials were now desperate to buy the website and offered the relatively robust price of $1,000 (for my $9.99 domain name that I was not using). But I turned it down, since their desperation had made my leverage clear. We ultimately settled on $10,000 for the domain name.

In the diplomatic realm, the perception of leverage also can be used effectively, but a strong leader must control the bureaucratic momentum that wants to see constant progress in the negotiation. Also, the government officials handling the day-to-day aspects of the negotiation often have a greater incentive to reach any agreement rather than reaching the optimal agreement since the costs and benefits of the deal usually do not affect the officials individually, but the officials do receive credit for having reached an agreement. To address this conflict and to ensure the application of the best strategies for certain negotiations, I personally took charge of certain negotiations while I was serving as Ambassador.

Creating Lasting Agreements

Imagine you are in the market to buy a used Corvette sports car and you see one advertised for $5,000. You view the car, check under the hood, and put in an offer to purchase it for $4,500.  The seller immediately accepts. You are now the proud owner of the Corvette. Are you happy?  Of course not, because you are kicking yourself for not initially offering $4,000!

The strongest agreements are created like diamonds — through extreme adversity. Clients and governments often struggle with adversity, incorrectly believing that tense, adverse negotiations are less likely to reach resolution. My experience has shown the opposite. Companies and governments respect counterparties that understand clearly what their interests are and push hard for them. Moreover, pushing hard for positions feeds into the perception of leverage. Agreements ultimately require both sides to give on positions that they would prefer not to, but pushing for your interests (while continuing to remember to be “soft on the people”) is generally positive for producing a strong agreement.

Unlike the one-off purchase of a used car from a stranger, M&A agreements between companies and government-to-government agreements require both sides to work together after the agreement is signed. If one party feels it should have gotten more in the initial agreement, it is more likely to try to gain some of that in the period after the agreement has been signed. This comes up frequently with indemnification provisions in certain M&A agreements. In private M&A agreements the seller generally represents there are no material problems with the business being sold except for problems the seller already has disclosed to the buyer. If the buyer finds issues after the sale that were not disclosed previously, the buyer has certain rights to seek indemnification (i.e. payment) from the seller. A buyer who feels he negotiated the best deal possible in the M&A agreement and is happy with the state of the business when acquired typically is less likely to pursue indemnification for smaller issues or even to search extensively for potential problems. Buyers who feel the opposite will hunt for problems they can use to justify indemnification demands.

 Similarly, in multi-lateral agreements, such as those underlying the World Trade Organization, we see countries that do not believe their interests were sufficiently addressed in the negotiated agreement using domestic legislation to pursue additional benefits. For example, in the last decade, we have seen actions by the EU to protect its market from Chinese solar panels (and now Electric Vehicles) by using domestic anti-dumping legislation that China has challenged as being a violation of the WTO. In essence, the EU is trying to claw back additional benefits that do not appear in the WTO agreements themselves because it is not satisfied with the terms of the WTO.

Conclusion     

Mastering the art of negotiation requires focusing on relationships and the perception of leverage while simultaneously engaging in tense, adverse negotiations. Everything works together. A tense, adverse negotiation on the issues cannot be maintained if there is not a relationship that ensures the parties do not give up on the negotiation. At the same time, pushing hard on issues is critical to projecting a strong perception of leverage. The surest way to achieve the best and most lasting result in a negotiation is to start at the most extreme position that will not cause the negotiation to fall apart. In numerical terms, the natural outcome of a negotiation between the numbers 0 and 10 would be 5. The best result will be achieved when both parties start out reasonably far away from 5, perhaps at 2 and 9, and then end up compromising at 5. But if your counterparty starts at 9 and you start at 4, you likely will end at a higher number than you wanted and will be disappointed.

In Government-to-Government negotiations, diplomacy is the glue that maintains the relationships during tough negotiations. Ambassadors and the entire United States diplomatic corps’ frequent contact and relationship building activities with all of the various host governments around the world allow difficult negotiations to occur while maintaining friendly relations.

Ambassador Michael DeSombre currently leads the Asia Mergers & Acquisitions
practice and the Korea and Southeast Asia practices for Sullivan &
Cromwell. He served as Ambassador to the Kingdom of Thailand (2020-2021)
and is recognized as one of the preeminent M&A and private equity lawyers
in the world and is a frequent speaker on the art of negotiation.

 

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