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Updated: 9 Sep 2021

Overconfidence in Negotiation

overconfidence

Summary

This case study reveals how overconfidence can negatively affect a negotiation.

Balanced Confidence

Negotiation courses often suggest that business managers need to possess a high level of confidence to succeed. Confidence allows managers to meet the many challenges they face in a fast-paced and evolving business climate. However, there’s a hazy line that separates being confident in what we do and becoming overconfident.

Overconfidence is a serious mental error that lurks in the background, like a banana peel lying innocently splayed on the sidewalk. Being overconfident can cause us to not pay attention to important information. It can also cause us to miscalculate by making assumptions.

Overconfidence in Negotiations

RJR Nabisco was having a bad year with its stock performance. The CEO of the company, Ross Johnson, thought that this was an opportune time to attempt negotiating a leveraged buyout to increase the shareholder’s value of the stock. He and his management group entered into negotiations with the board of director’s special committee. This committee had been assigned with the particular task of finding ways to maximize the shareholder value.

Since he was the CEO of Nabisco, Johnson was confident that, because of his close ties to the company, his buyout attempt would be the proverbial “no-brainer.” He outstepped his confidence and found the banana peel instead. His overconfidence led him to fall into the trap of making assumptions and jumping to a wrong conclusion.

Huge Mistake

His first mental lapse was to assume that his company connections would automatically give him the “go-ahead” to make the buyout happen. He made a second mistake of assuming that his investment bankers would simply have to put the financing in place. Also, that the RJR board of directors would give him the power to manage the buyout. So, together with his main financial partner, Shearson Lehman Hutton, he offered an initial buyout price of $75 per share.

The initial offering meant that his management team would only have to put up $20 million, or 8.5% of the total offer. If the board acceded to this offer, then Johnson’s management team would receive 18% of the company’s total equity. Johnson was also insisting that they divide the 18% equally amongst the 15,000 personnel who were employed for RJR Nabisco. However, he neglected to mention that, in reality, only six names actually appeared as the real beneficiaries of the transaction – a real but unintentional “Oops!”

Don’t Slip on the Banana Peel

So stroked by his overconfidence in closing the buyout, he moved ominously close to the waiting banana peel. He wasn’t paying attention to several occurrences that were transpiring in the meantime. First, the board never discussed or made any concessions with Johnson or his financiers. Johnson also never even conceived there were any other players who might also be interested in buying Nabisco. In truth, he had so alienated the board with his attitude that they eventually awarded the buyout bid to an investment banking firm, Kohlburg, Kravis, and Roberts (KKR) for $109 million. One might think they were making the higher bid, right?

Wrong! KKR’s bid was actually lower than Johnson’s bid. The board was so ticked off at Johnson that they took the loss instead. They appreciated KKR’s negotiation flexibility. They also believed that KKR would have a more positive influence on the company than Johnson’s “arrogance and overconfidence.” So, the moral of the story is that when you become overconfident and full of yourself, just remember there’s almost always a banana peel lying there in wait.

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