Back to Thought Leadership

Avoiding WYSIATI Traps in M&A Negotiations

Joe Basile, Managing Director, Pari Passu M&A Mediation LLC

After a 40-year run, the owners of a family business decided that it was time to sell.1 The owners had started the business from scratch and built a highly successful operation with several hundred employees and revenue in excess of $500 million, but had paid themselves modestly for many years. Anticipating active interest in the company, the owners hired an investment banker to organize an auction. After several rounds of bids, the banker asked two potential buyers – a private equity sponsor and a strategic buyer – to submit their best and final offers. The private equity sponsor overbid the strategic buyer by approximately $15 million, but the strategic buyer emerged as the winning bidder.

This outcome seems surprising on the surface, but is readily explainable with the benefit of additional information. The family business owners cared deeply about their employees and did not want to subject them to the uncertainty of another sale process anytime soon. Assuming that a private equity buyer would necessarily seek an exit within a few years, the sellers therefore favored the strategic bidder. Conversely the private equity bidder assumed that the seemingly cash-poor sellers were seeking the largest possible pay day, and structured its bid accordingly. Relying on their assumptions about each other, neither the seller nor the private equity bidder took the time to understand their respective interests and hence failed to explore the possibility of finding a deal structure that might maximize value for both of them. Both missed an opportunity – because of WYSIATI.   

WTH is WYSIATI?

In his seminal book, “Thinking, Fast and Slow”, Nobel Prize winning psychologist Dr. Daniel Kahneman explained how the wiring of the human mind often leads us to reaching conclusions quickly on the basis of mental shortcuts and intuitive impressions rather than thoughtful fact finding and analysis. While the ability to use “fast thinking” to form judgments and conclusions swiftly can be useful in certain situations, the results are frequently sub-optimal.

According to Dr. Kahneman, one of the most powerful engines of intuitive thinking is the tendency to form conclusions from a tiny subset of a larger body of potentially available information. That small subset consists of information that is readily available to the decision maker regardless of the quantity or quality of that information. Information that a decision maker does not easily recall or obtain becomes irrelevant to the decision.

To illustrate, Dr. Kahneman offered the following exercise. Suppose you are asked “Will Mindik be a good leader? She is intelligent and strong.” Dr. Kahneman predicts that most people presented with this information will quickly say yes because of the positive connotations of the words “intelligent” and “strong”. However, if further inquiry would reveal that Mindik is also corrupt and cruel, the initial judgment would prove to be faulty. The problem is that few people, before expressing a judgment on the basis of the limited information initially provided, pause to ask, “What additional information would I need to know before forming an opinion about the quality of someone’s leadership?”

Dr. Kahneman coined the acronym WYSIATI to refer to the phenomenon of leaping to conclusions on the basis of limited, readily available evidence.2 The acronym stands for “what you see is all there is”.

WYSIATI helps us easily develop coherent explanations of the observations we make in a world that is complicated and messy. It can be useful, even life-saving, when a quick decision is necessary. Imagine for example an air traffic controller drawing on years of experience to make a split-second assessment of a complicated, dynamic radar display and deliver exactly the right instructions to airborne pilots.  

The downside of WYSIATI is that it often results in decision making without adequate consideration of whether and what additional information should be obtained to improve the quality of that decision. Too frequently WYSIATI leads to overconfidence in faulty judgments and the suppression of thinking and inquiry that may challenge initial conclusions.

WYSIATI in M&A Negotiations 

WYSIATI is unfortunately pervasive in M&A negotiations, hampering the effectiveness of negotiators and masking opportunities for value creation. Examples of ways in which WYSIATI can impair M&A negotiations include the following:

  • Failing to look behind the “game face”. Although there may be situations in which negotiators know each other very well, in most cases negotiators are either meeting for the first time in the context of the deal they are negotiating or dispute they are trying to resolve, or know each other only from similar prior negotiations. Typically negotiators  “size up” the person across the table on the basis of the interactions that take place during negotiations – WYSIATI. A negotiator who does not make the effort to learn all that is possible about her or his opposite number will miss valuable opportunities to make an interpersonal connection that can facilitate negotiations, discover a potentially useful pressure point, and better understand the communications that take place during the negotiations. No less an accomplished negotiator than Dr. Henry Kissinger made it his practice to learn all that he could about the background, psychology, relationships, negotiating context and culture of his negotiating counterpart, and then would customize his approach and tactics accordingly.3    
  • Failing to consider internal stakeholders. A common oversight in M&A negotiations is concentrating attention only on the individual negotiators for the counterparty without considering the potential identities and views of other internal stakeholders – WYSIATI. Although most negotiators recognize that the individual across the table will likely report to and take direction from a superior in the organization, there will inevitably be additional individuals with an interest in the outcome of the negotiations who will be adding their voices to the internal debate. Examples include individuals in an organization’s finance, accounting, tax, HR, marketing, legal, and IT functions; leaders of a business unit that will be affected by the outcome of the negotiations; and board members who may have a strong view on an outcome. The intra-mural eco-system in which one’s opposite number is operating can upend negotiations if overlooked.4    
  • Failing to account for external influencers. In any M&A negotiation, the identity of the counterparties is obvious – the representatives of each are generally across the table from each other. The understandable tendency is to conduct the negotiation solely with the party or parties across the table – WYSIATI. It is rarely the case that the only persons with a stake in the outcome of the negotiation are those represented in the physical or virtual room. External influencers, for example regulators, politicians, stockholders, lenders, suppliers, customers, competitors, and unions are often interested in and affected by the result of a deal negotiation or the resolution of a dispute. Focusing solely on the parties at the table without considering external influencers and how those external influencers may view or be able to affect the possible outcome of the negotiations jeopardizes success at the bargaining table.
  • Getting weighed down by “anchors”. Because of WYSIATI a first move can have a powerful anchoring impact, especially in single issue negotiations. Although not inevitable it is often the case that when a party in a negotiation proffers a suggested price or settlement figure, that number will have a significant influence on thinking of the receiving party. A high opening asking price will often result in a buyer thinking that a high price will be necessary to close the deal or, in the case of dispute resolution, to settle the claim. Although experienced negotiators like to think that they are immune from being influenced by extreme anchors, research suggests otherwise.5 Alternatively an extreme first move may have the effect of causing the other side to respond with an equally extreme counter-offer, often leading to a protracted “negotiation” that consists of the parties haggling toward a number somewhere in between. In either case, the response to a first move often demonstrates WYSIATI at work.    
  • Focusing on positions rather than interests. Perhaps the most significant lost opportunity for value creation in M&A negotiations results when negotiators focus on each other’s position without probing to uncover their underlying interests. Recognizing the difference between position and interest is critical to optimizing the result of a negotiation. A party’s position is that party’s stated “ask” in a negotiation. By contrast an interest is that which motivates a party to take a particular position. For example, a seller in a deal structured to include an “earn out” upon attainment of certain post-closing revenue targets may insist that a buyer commit to using “commercially reasonable efforts” to achieve those targets. A buyer may reject this request and insist with equal energy that it never accepts post-closing “efforts” obligations in earn out deals. Looking behind positions, the seller’s underlying interest may be to insure that the buyer does not sideline the acquired business after the closing leading to loss of the contingent consideration for the seller. The buyer’s underlying interest may be a concern with committing to a vaguely worded obligation that could result in costly and distracting post-closing disputes with the seller. Once the parties understand each other’s interest, they are more likely to be able to find acceptable solutions. To continue with the example, substituting a list of specific post-closing investment, staffing and marketing commitments for a promise to use “commercially reasonable efforts” may provide the seller with the necessary level of assurance and the buyer with sufficient clarity regarding its post-closing obligations. The distinction between position and interest and the usefulness of appreciating that distinction in negotiations has long been part of the negotiator’s canon6. Locking in on expressed positions without exploring interests is classic WYSIATI.

Some Suggestions for Avoiding WYSIATI Traps

WYSIATI is such a potent driver of decision making that Dr. Kahneman himself expressed doubt about our capacity to overcome it.7  With all due respect to Dr. Kahneman, there is good reason for optimism. One of the challenges in harnessing WYSIATI is that it operates so powerfully that we are seldom conscious of it.  Having the benefit of Dr. Kahneman’s insights into identifying WYSIATI, we are in a position to mitigate its effects.  Here are some suggestions for avoiding WYSIATI traps in M&A negotiations:

  • Ask questions. Most M&A negotiators are hard-wired to speak in declarative sentences.  Interrogatory sentences are heard much more rarely at the bargaining table. This is a classic manifestation of WYSIATI. It follows that training oneself to ask questions before asserting views would be an effective way to slow down one’s thinking and thus avoid a number of WYSIATI traps. Among the questions that would be useful for negotiators to ask, two stand out. The first should be directed by the negotiation team leader to each internal stakeholder and to each member of the negotiating team at the very outset: “what information do we not have that would be relevant to our negotiating strategy and objectives?”. Cataloging the “known unknowns” and, to the extent possible, the “unknown unknowns” is an excellent way to organize pre-negotiation preparation (see below). The second important question should be asked in response to the receipt of a proposal from a counterparty in negotiations: “please explain why you are making the particular proposal that you have made?”.  This “why” question is one of the most powerful items in a negotiator’s tool-box for moving away from positional bargaining and toward interest-based negotiations.8  
  • Painstaking preparation. A number of the examples of WYSIATI traps described above arise from conceiving of negotiations as only that which takes place during the meetings between the parties. Just as meticulous preparation has long been recognized as key to success in military affairs9, so too in negotiations. Any M&A negotiation should commence with a disciplined exercise in gathering all legitimately available information about one’s own situation and interests, the situation and interests of the other parties, the negotiators representing the other parties, and the internal stakeholders and external influencers of all parties.
  • Resist binary thinking. All too often, M&A negotiations rapidly devolve into contests over competing positions. As a result, negotiators find it difficult to “split the pie” in a way that satisfies all parties. Even worse, inventive solutions that create value for the parties becomes elusive (if even considered). The reason – WYSIATI. Each party quickly becomes convinced that its position is the “right answer” and the ensuing negotiations become an effort to convince the other parties of the error of their ways. The dynamic is exacerbated by the failure to explore the interests underlying each party’s position and the effect of anchors described above. Value-creating outcomes are more likely if, before locking into positions, negotiators take the time to develop a variety of options that would satisfy their interests.10 This exercise should be part of the preparation that negotiators undertake before arriving “at the table” and should continue as a dynamic process as the parties learn about each other’s perspective and interests during the course of discussions.  In addition, parties should structure their negotiations so that there is an opportunity for the parties together to brainstorm and discuss options.

One Final Note

Readers are encouraged to give further thought to other ways in which they have experienced negative effects of “fast thinking” in M&A negotiations and potential ways to mitigate the problem. Relying only on the observations and suggestions offered in this article would, of course, be WYSIATI.     


 

  1. The following deal summary is based on an actual transaction, with identifying details omitted to preserve confidentiality. ↩︎
  2. [ii] Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Strauss and Giroux 2011), 85-88. ↩︎
  3. James K. Stebenius, R. Nicholas Burn and Robert H. Mnookin, Kissinger the Negotiator (New York, HarperCollins 2018), 189-210. ↩︎
  4. Bennett G. Picker and Conna A. Weiner, Commercial Mediation Practice Guide (Chicago, American Bar Association 2023), 76-77. ↩︎
  5. Dwight Golann, Mediating Legal Disputes (Chicago, American Bar Association 2021), 82-84. ↩︎
  6. Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In (New York, Penguin Books 2011), 42-57. ↩︎
  7. Thinking, Fast and Slow, id. at 264. ↩︎
  8. Getting to Yes, ibid.; Joseph Basile, “Using Mediation to Maximize Value in M&A Disputes”, The M&A Journal (Vol. 22, No. 9, 2023). ↩︎
  9. “Thus it is said that one who knows the enemy and knows himself will not be endangered in a hundred engagements.  One who does not know the enemy but knows himself will sometimes be victorious, sometimes meet with defeat.  One who knows neither the enemy nor himself will invariably be defeated in every engagement.”  Sun-Tzu, The Art of War (Ralph D. Sawyer translator, Boulder, Colorado: Westview Press 1994), 179. ↩︎
  10. Getting to Yes”, id. at 58-81. ↩︎
Joe Basile is founder and managing director of Pari Passu M&A Mediation, an independent specialist practice that focuses exclusively on the resolution of M&A-related disputes.  In addition to practicing as an M&A deal lawyer for more than 40 years, he has trained as a mediator in the executive education program of the Harvard Law School Program on Negotiation.