Case Study

Negotiation Overconfidence

overconfidence

Summary

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

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Successful business managers need to possess a high level of confidence to succeed and meet the many challenges they face in a fast paced and evolving business climate. There is a line that separates being confident in what we do, and slipping across this hazy line into becoming overconfident. Overconfidence is a serious mental error that lurks in the background like a banana peel lying innocently splayed on the side-walk. Overconfidence can cause us to not paying attention to important information, and also to miscalculate by making assumptions.

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 directors’ special committee that 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 buy out attempt would be the proverbial ‘no-brainer’. He out stepped his confidence and found the banana peel instead. His overconfidence led him to fall into the trap of making assumptions and jumping to an erroneous conclusion.

His first mental lapse was to assume that his company connections would automatically give him the ‘go-ahead’ to make the buy-out happen. He made the second mistake of assuming that his investment bankers would simply have to put the financing in place, and that the RJR board of directors would also give him the power to manage the buy out. 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 dollars 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 the 18% would be divided 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!’

So stroked by his overconfidence in closing the buyout he moved ominously close to the waiting banana peel because 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 dollars. 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 because they appreciated KKR’s negotiation flexibility, and believed that KKR would have a more positive influence on the company rather 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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