Shuffleboard, Chess and the Pilgrim, Hillshire Deal

Business strategy can learn much from chess, but in many ways it is considerably more complex.    In chess and in business, it is not enough to envision your next moves, you must anticipate your competitor's response to those moves and the other actions they are taking.  Thus an game theoretic approach is essential.

But the chess analogy only takes us so far.  In business, moves are made simultaneously, not sequentially as in chess.  In addition, the rules of the game (think regulations) are frequently changing and the space (chessboard) on which you play is constantly changing.  Moreover, your competition is not a single opponent but every player in your industry and every player in related industries.  

In today's news, the analogy to shuffleboard also seems appropriate, where a well placed move is slammed aside by a competitor.  Hillshire Brands had wanted to acquire Pinnacle foods for some time.  Recently it made a $4.3 billion bid for the company touting the synergistic possibilities of the deal.  

Those plans were disrupted today as Pilgrim Foods (owned by JBS)  offered to acquire Hillshire for $45. a share, a 25% premium to recent market prices.  However, the deal is contingent on Hillshire abandoning the Pinnacle deal.  The market prices of Pilgrim and Hillshire rose while those of Pinnacle declined.  

Also, of interest, is that Hillshire was aware of the interest by Pilgrim over two months ago.  In chess, white moves first and has a slight advantage.  One can only wonder if the Pinnacle deal was responsive and defensive, designed to thwart the revealed interest from Pilgrim.  

Unlike chess, the market continually appraises the value of the players.  The market price of Hillshire closed above the bid price of $45.  producing a negative speculation spread.  Apparently, the market expects further revisions to the Hillshire bid.  (Additional details are found in the Wall Street Journal.)

All the best,

Ralph

Position, Flexibility, Power, and Knowledge: Chess Moves for Acquisition Success

Sunday's New York Times contains an interesting discussion about bargaining by Robert H. Frank.  The context of the discussion is politics and how, in Frank's view, the Republicans are in a weakened position to bargain.  While one might take issue with some of the political viewpoints, the discussion of bargaining is unassailable.  Knowing the bargaining strengths and weaknesses of each side is crucial in negotiations.  In particular, know the BATNA - the Best Alternative To a Negotiated Agreement.  

Frank writes:

"The Warner Brothers 1999 hit comedy 'Analyze This' portrays a mob boss (Robert De Niro) and his psychiatrist (Billy Crystal), who share a passion for the recordings of Tony Bennett. With the film almost completed — and with Mr. Bennett already an integral part of the plot — the studio finally got around to approaching the crooner with an offer of $15,000 to sing 'I’ve Got the World on a String' in the movie’s closing scene. But as Danny Bennett, the singer’s son and business manager, later explained, the executives made a fatal mistake by not scheduling this conversation sooner: 'Hey, they shot the whole film around Tony being the end gag and they’re offering me $15,000?'

Had studio officials made their offer at the outset, they would have had much more leverage. If the Bennetts demanded an unreasonable sum, the filmmakers could have rewritten the script and used some other singer. At the 11th hour, however, Warner Brothers’ best alternative to a negotiated agreement was to spend hundreds of thousands of dollars reshooting the film. In the end, the studio paid Tony Bennett $200,000 for a brief cameo appearance."

The same thing occurs in mergers and acquisitions.  When we know the strengths and weaknesses of both sides of a deal, we are better able to strike favorable terms.  In part, this ties back to synergies, strategies and necessity.  What are the synergies in this deal?  How many are unique?  That is, how many are available to one particular bidder?  To the extent this occurs, that bidder is in a stronger bargaining position.  In situations where any bidder can achieve synergies, the power flows back to the target.  

What are the strategic needs of both sides?  Does one side need the deal to prosper - or to survive?  The bargaining power of each side increases with their own BATNAs. 

There are numerous implications for this.  We'll mention just a few.  First, always be thinking strategically.  Strive to be 'anticipating and acting' - thinking proactively rather than 'reacting' to some exogenous shock to your firm.  Thinking ahead could have reduced the amount paid to Tony Bennett.  It can also result in more favorable terms in acquisitions.  Try to place your firm in a position of strength.  Second, enter the negotiations with as much information as possible.  As we've written elsewhere, negotiate on multiple fronts, not just price.  

The essence of a BATNA is simple - it is our opportunity cost - what we could be doing if we were not doing this deal.  Position, Flexibility, Power, and Knowledge.  They work in chess - and in acquisitions.