Dr. George Pinteris, academic director for the Specialized Masters in Business Finance program at Fisher College of Business, wanted to try out a merger simulation with his Corporate Finance II classes. He assigned us the Wrigley-Mars merger cases to analyze. Half the class read the information to which Mars was privy, the other half Wrigley. My team and I were assigned to Mars (the buye), in the transaction. Dr. Pinteris used one lecture period as an initial discussion of the information to which both parties had access and to emphasize that there was more to this transaction than the price Mars paid to acquire Wrigley.
My group based our negotiation strategy on five factors, in addition to the price: the placement of the current target’s CEO; the plans for one of the target’s most treasured and iconic assets (Wrigley Headquarters in Chicago); the naming of the merged company; the independence of the target’s management post-merger; and the extent to which the acquirer can impose efficiency measures on the target after the merger. As the buyer, we packaged three deals with varying premia over the current share price and over the intrinsic value—an initial offer, a target offer, and a walkaway offer.
When we began negotiations, because we were the buyer, we made the first offer: a meager control premium over current market value, with a number of conditions that granted the target substantial operational independence. The target’s counteroffer was revealing: they mentioned that they wanted a more equitable share of the synergies from the merger and countered with a very high offer outside our acceptable range. We came back with a larger control premium, with a number of more restrictive terms than the initial offer. For example, we did not place the target’s CEO in as important a position and we insisted on greater efficiency measures. The target countered with $79, still intent on capturing larger portions of the synergies in the transaction, but this time they disapproved of our demotion of the target CEO. We offered to increase our price to $75 and place the target CEO on the Board of Directors. They offered to go down to $77 with the same conditions. My group did not want to increase our price, but we had reached a set of conditions with which we were very pleased. When we offered an additional board seat, the other team acted utterly taken by surprise. After about five minutes of hushed discussion in their group hunched over their own valuations in Excel, they accepted. It was a term that neither of our groups had seriously considered, but it was something that ultimately allowed us to close the deal at a price more amenable to us, the buyer.
We had begun the negotiations with the goal of getting the lowest price with terms that would preserve Wrigley’s independence. Instead, we walked away by paying $3 over our target, but the counterparty had practically given us as much as we needed to achieve synergies by ceding decision-making authority over its Chicago headquarters, over its management and employees, and general operational aspects of the business—Wrigley had practically handed us all the synergies we needed to make the deal worth it.
In Dr. Pinteris’ next lecture, we discussed our experiences in the merger. All of our negotiation experiences had been quite different, and Dr. Pinteris used this lecture to illustrate the different scenarios that play out with different zones of agreement on price and to illustrate the importance of qualitative factors in the negotiations. I thoroughly enjoyed this simulation that Dr. Pinteris set up for us—it was hands-on and engaging, and I think I learned more about M&A negotiations than if I had simply read the case and participated in the class discussion.