Tuesday, March 15, 2016

Using Round figures in Negotiations may be disadvantageous

In this Harvard Research paper on "Initial Offer Precision and M&A Outcomes", the researchers put forward evidence to show that the maker of the first offer may be able to further tilt the bargaining game to her advantage by expressing the offer price in precise terms. For example, a list price of $1,020,000 is more informative and likely to lead to a smaller price adjustment than a list price of $1,000,000.

In another example, he states that a bid for $10.20 per share leaves the impression that the bidder is less likely to revise the bid significantly upward than a bid for $10.00 per share.

Some of the reasons are
1. Competing bidders may view precise offers as more informed, and, perhaps because of the winner’s curse, may not wish to enter a bidding contest against an ostensibly more informed bidder
2. Targets may interpret precise offers as evidence that the acquirer is informed and knows what it is doing.
3.  Targets may be more willing to close the deal with a party they consider competent

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