Microsoft and Yahoo: Where were the mediators?
They help countries and couples. Why not businesses?
When Microsoft CEO Steve Ballmer met with Yahoo CEO Jerry Yang earlier this month, what kept them from making a deal? With Microsoft offering $33 per share for Yahoo's stock, and Yahoo willing to take $37, was there truly an unbridgeable gulf? The $4 gap seems trivial in comparison to the potential value of the deal. So did Microsoft and Yahoo walk away from a deal that would have made both sides better off? This type of bargaining failure is hardly rare – businesspeople frequently report deals that have come within inches of closing, only to slip away at the last moment, costing their companies plenty.
In the world of litigation, settlement gaps are routinely bridged with the help of mediators. In the world of foreign policy, mediation – sometimes called "shuttle diplomacy" – is used extensively to resolve conflict. Why, then, are business transactions rarely mediated?
One theory is that the functions that mediators perform are already handled by transactional lawyers and investment bankers who work hard – and are handsomely rewarded – to close deals. The problem with this theory is that the lawyers and investment bankers often approach the negotiation from a partisan perspective in order to prove their loyalty to their respective clients.
A more promising explanation is that when conflicts arise – as in a potential hostile takeover situation such as the Microsoft-Yahoo negotiations – the parties reject compromise because they see the world through a distorted lens. Conflict can cause "reactive devaluation" (a negative assessment of a proposal because it comes from an opponent). Neuroscientists tell us that conflict triggers some of our most primitive reactions – a fight-or-flight response – as opposed to the collaborative impulse required for dealmaking.
It's not surprising, then, that people – especially in business settings, where egos, competition, and high stakes collide – are unlikely to opt for mediation unless they are forced, or strongly urged, to do so. In the world of diplomacy, it is often the superpowers that intervene when smaller nations quarrel, and court cases are often mediated because a judge insists on it. Indeed, Microsoft mediated its antitrust dispute with the Justice Department only when the court ordered it. In the setting of mergers and acquisitions, however, the key difference is that there is no outside power that can insist on mediation. Accordingly, it is often up to boards of directors or shareholders to push management to mediation.
Dealmaking mediation has been used for years to create collective-bargaining agreements and to resolve impasses in the negotiation of major league sports contracts. In a recent article, law professor Scott Peppet reported that almost 40 percent of the mediators he surveyed had mediated deals, including the sale of cable television access rights, the negotiation of angel funding, a joint venture between a small business and a Fortune 500 company, and many others.
Mediators add value by bringing a neutral and independent perspective to the table, buffering the parties' sometimes harsh communications, clarifying their underlying interests, and making sure that all deal options are considered.
In the Microsoft-Yahoo negotiations, a mediator could have helped in several concrete ways.
First, since disagreements about the price of a company usually turn on financial predictions, mediators can help the parties structure creative options for mitigating their risks. Acquisition agreements often contain "earn-out" provisions that award benefits to the seller if the deal turns out to be a winner for the buyer. Without any investment in the outcome, mediators become "honest brokers" who can advance such ideas without the perception that they are seeking an advantage based on secret knowledge.
Second, a mediator can help the parties obtain neutral and independent opinions – as opposed to the potentially partisan opinions of the parties' hired experts, lawyers, and investment bankers.
Third, a "mediator's proposal" can test the waters of compromise. Let's say the mediator asks each side to tell the mediator – on a confidential basis – whether they would accept a deal at $35 per share. This protocol means the mediator will report the answers only if both sides say "yes." Thus, each side can take the risk of saying yes because the other side will never know unless they, too, have said yes.
When deals collapse, conflict often migrates to another venue. Yahoo is already defending lawsuits from disgruntled shareholders, angered by management's failure to accept Microsoft's offer. However, even if there were no possible zone of agreement in the Microsoft-Yahoo case, business managers in other deal negotiations might consider whether calling in mediators, when needed, might save them from bargaining failures and make both sides better off.