Driven by competitive pressures for globalization and facilitated by the liberalization of markets worldwide, cross-border mergers and acquisitions grew explosively during the 1980s, paused in the early 1990s, and are again increasing. Particularly in Europe, the number of cross-border deals soared from around 400 in 1986 to almost 2,000 in 1991 — representing almost 60 percent of all deals in Europe — and are now around 1,500 annually. The value of such deals has grown proportionately more than their impressive raw numbers;1 indeed, on a single remarkable day — “Mad Monday,” 13 October 1997 — more than $120 billion in cross-border European mergers and acquisitions were announced. While analysts have dissected many economic and financial aspects of this powerful trend, they have paid relatively little attention to the negotiating processes involved in these transactions. In this case study, I explore a sequence of acquisition negotiations by one Italian firm, Societa Metal-lurgica Italiana SpA (SMI), that consistently overcame seemingly insurmountable obstacles. From SMI’s skillful approach, I distill broad lessons for effectively negotiating cross-border deals.
Many companies negotiate cross-border transactions routinely, using familiar scripts for effective deal making: “map” or enumerate and characterize the parties, assess their interests and their no-deal alternatives, envision potential agreements and the bargaining range, craft processes for both creating value and claiming it, pay attention to the sustainability of agreements, and so on.2
Yet, when financial negotiations cross borders, this general advice needs elaboration to fit the context, especially for inherently challenging transactions. Another country’s politics, culture, and corporate governance policies can erect nearly insurmountable obstacles. In “fortress” Germany, for example — in which one of SMI’s most successful deals was consummated — only three hostile takeovers have been completed since 1945, despite numerous attempts. Even friendly mergers occur far less frequently in Germany than in the United Kingdom or the United States.3
Italian tire manufacturer Pirelli’s abortive effort to acquire German competitor Continental Gummiwerke exemplifies the efforts of many outsiders to make acquisitions in Germany. In 1990, Pirelli — with full financing and the apparent support from a majority of Continental’s shareholders, including Deutsche Bank — tried to negotiate a merger with Continental. The process triggered a widely publicized, acrimonious confrontation, and Pirelli failed to secure a sufficient voting stake in its German competitor, suffering a humiliating rebuff from Continental management and a loss of more than $430 million.
1. For a discussion of the statistics in this introduction, see, for example,
European Commission Directorate General for Economic and Financial Affairs, “Mergers and Acquisitions,” in European Economy: Supplement A, Economic Trends, Supplement A, number 3 (Brussels, Belgium: March 1995), pp. 1–9; and
J. Bleeke and D. Ernst, eds., Collaborating to Compete: Using Strategic Alliances and Acquisitions in the Global Marketplace (New York: Wiley, 1993).
2. See, for example:
T.C. Schelling, The Strategy of Conflict, revised edition (Cambridge: Harvard University Press, 1980);
H. Raiffa, The Art and Science of Negotiation (Cambridge: Belknap Press of Harvard University Press, 1982);
D.A. Lax and J.K. Sebenius, The Manager as Negotiator: Bargaining for Cooperation and Competitive Gain (New York: Free Press; London: Collier Macmillan Publishers, 1986);
M.H. Bazerman and M.A. Neale, Negotiating Rationality (New York: Free Press, 1992); and
W. Ury, Getting Past No (New York: Bantam Books, 1991).
Some of this advice has been customized to financial situations in sources such as:
J.C. Freund, “Friendly Deal Requires Acquisition Mating Dance” Legal Times, volume 8, 14 October 1985, p. 10 ff;
G.E. MacDougal and F.V. Malek, “Master Plan for Merger Negotiations,” Harvard Business Review, volume 48, January–February 1970, pp. 71–82;
R.F. Bruner, “Understanding Merger Negotiation: Teaching with a Merger Bargaining Exercise (Part I),” and “Understanding Merger Negotiation: Testing Rational Choice and Behaviorism in Simulated Bargaining (Part II),” Financial Practice and Education, volume 2, Spring/Summer 1992, pp. 7–17 and 55–65; and
S. Reed Foster and A. Reed Lajoux, The Art of M&A: A Merger/Acquisition/Buyout Guide, second edition (Burr Ridge, Illinois: Irwin, 1995).
3. See J. Franks and C. Meyer, “Ownership, Control, and the Performance of German Corporations,” (London: London Business School and University of Oxford, mimeo, 1995).
Of course, since reunification, the Treuhandanstalt has presided over a greatly increased volume of privatizations and liquidations of enterprises in former East Germany. This article focuses more on negotiations in what was the Federal Republic of Germany.
4. M. Albert, Capitalism Against Capitalism (London: Whurr, 1993), p. 90.
For more on the AGF-AMB negotiation and associated issues, see:
R. Sally, “A French Insurance Firm and ‘Fortress Germany’: The Case of AGF and AMB” and associated appendix (Fontainebleau, France: INSEAD Cases 394-052-1 and 394-052-5, 1994);
H.J. Kim, “Markets, Financial Institutions, and Corporate Governance: Perspectives from Germany,” in Law and Policy in International Business, volume 26, January 1995.
T. Baums, “Takeovers versus Institutions in Corporate Governance in Germany,” in Contemporary Issues in Corporate Governance, D.D. Prentice and P.R.J. Holland, eds. (Oxford, England: Clarendon Press, 1993).
5. See, for example:
J. Charkham, Keeping Good Company: A Study of Corporate Governance in Five Countries (Oxford, England: Clarendon Press, 1994).