For those of us who teach modern negotiation theory, the stalled sale of mutual insurer London Victoria (LV) to Bain Capital, then to Royal London, has been a wonderful case study on how not to conduct deal talks.
The journey started well for LV’s board. Their competitive process flushed out bids not only from Bain Capital, but also from Royal London. Both bids were apparently extremely similar, but the board chose Bain Capital, a private equity giant far removed from the world of not-for-profit distribution.
From the vantage point of an informed observer, LV’s Chairman, Alan Cook and Chief Executive, Mark Hartigan ran what theoreticians call a “hard distributive negotiation strategy”; highest bidder wins all.
The good news ended there for the board after it failed spectacularly to get the necessary two-thirds vote from LV’s 1.2 million small members and the deal collapsed. After the deal fell through, Royal London had been waiting in the wings, but those talks quickly fell apart as well, leaving LV to try and justify a decision to remain independent.
LV’s leadership appears to have replicated their hard bargaining strategy with their members. They were offered £100, by any standards a low-ball, if the sale succeeded. This offer was time limited and couched within a threat: take the £100 or risk an uncertain future with LV.
This hard positional strategy grossly overestimated the board’s negotiating strength internally and undervalued what’s known as their members’ best alternative to negotiated agreement, or BATNA, and reservation values. If your BATNA is better than the offer, you should continue negotiating or walk away – here it was valued at above £100. Walkaway is represented by a member’s reservation value – again, in this case, more than £100.
If a counterparty has a strong negotiating position, strategists actively counsel against time limited offers and threats. They do not improve a weak offer and leave the offeror backed into a corner. Given a choice between losing something or maybe gaining something, most of us are risk averse. £100 was not attractive enough to set against losing mutuality.
Late on, Bain Capital, a highly experienced negotiator, rightly perceived the concern about mutuality and offered to ring-fence the members’ financial stakes. In layman’s terms, this is a win-win strategy. You move away from your hard position and focus on the underlying issues.
This was a sensible concession within a soft or principled approach. But it was too little, too late. Positions and personalities had become entangled. This was perhaps LV’s greatest failure.
If, as an exercise, the board had stepped into their members’ shoes, they may have better appreciated how the members would view the £100 offer, or their perceived involvement of Hartigan and Cook.
Instead, against growing disquiet about lack of transparency around transactional costs, LV hardened its position. Individuals started to be seen as part of the problem.
Perhaps a kind of groupthink has set in. In a closed group, this can make even the most highly professional people convince themselves they are right, even when they are manifestly not.
The most puzzling aspect is what has happened since: Royal London apparently stood ready to complete. Here, it would make sense for LV to accept its BATNA and seek members’ approval. Instead, the board is set to restart the entire process, attracting further criticism from external observers.
Why restart? Without inside knowledge, it’s impossible to know for sure. But there are a slew of options. Bain Capital’s deal might have contained something so intrinsically valuable (but not required to be communicated to members) which left Royal London’s offer wanting. Or, LV’s value may have improved so materially that it would be wrong to conclude a deal with the underbidder. A third, rather Machiavellian reason might be that the board preferred not to complete with Bain Capital but could not walk away because abort penalties might kick in on top of LV’s supposed £40m transactional costs? So, they left it to members to deliver the coup de grace and then kill the deal with Royal London.
The last possibility is the hardest to untangle: personal agendas in negotiations. The inability to separate substance and personalities has tainted the deal from the get-go. If LV had adopted a more integrative approach, recognised the issues most important to members, promoted transparency and built trust, the board may have carried their members on a shared negotiation journey. A cliché, but true in any negotiation: if you fail to prepare, then prepare to fail.