Co-Opetition - Adam M. Brandenburger [42]
Why did McCaw pay BellSouth to exit? McCaw could not be sure BellSouth would exit on its own or, if it did exit, whether it would be sooner or later. Sooner would be better. McCaw didn’t want any unexpected new bidders. As a senior executive at McCaw put it: “We nudged BellSouth to just walk away with $26 million.”14
McCaw’s payment to BellSouth to stop bidding was exotic but perfectly legal. American antitrust law generally prohibits one bidder from paying another to exit an auction. However, the takeover of a publicly traded corporation falls under securities law, and courts have held that securities law preempts antitrust law.15 Securities law does not prohibit “exit fees”; it only requires full disclosure. The thinking is that the prospect of getting an exit fee encourages weaker bidders to come into an auction in the first place and thereby increase share prices. Once several bidders have entered, shareholders of the company in play would obviously like to disallow exit fees. But that’s like trying to have it both ways.
Why didn’t LIN insist on a no-exit-fee clause in its contract with BellSouth? Perhaps LIN didn’t think of it. Still, it’s curious. If LIN thought to encourage BellSouth to enter with a payment, it should have considered that someone else might pay BellSouth to go away. It could have prevented that from happening.
We’ve now seen three different stories of becoming a player. Holland Sweetener and Norfolk Southern both fared poorly. Other players benefited at their expense. BellSouth did much better. The reason it made money is that it recognized who stood to gain from its entry. Having recognized this, it could negotiate for a share of that benefit.
A prospective player should always ask Cicero’s question: Cui bono? Who stands to gain? Holland Sweetener and Norfolk Southern didn’t ask Cicero’s question. BellSouth did.
Let’s apply the lesson of these stories to a familiar, everyday business situation.
Pay Me to Play The phone rings. A prospective customer explains that he is not satisfied with his current supplier and would like you to give him a bid. This is a large account that’s been with one of your competitors for some time. Here’s your chance.
What do you do? First, you tell the caller on the other line that you’ll have to get back later. Then you ask the customer for some specifics that will help you price the bid. When you get off the phone, you assemble a team to work out a bid. In spite of the friendly call, you know it’s a long shot, and that prompts you to work just a little harder and be just a little more aggressive on price.
In the back of your mind is the suspicion that the customer is using you to get a better price from his current supplier. But that’s the way the game is played, isn’t it? If you don’t bid, there’s no chance of getting the business. Moreover, you risk alienating the customer and losing any chance of future business. And how do you explain to your boss that you passed up an opportunity to get this business, especially if it turns out that the customer does end up switching suppliers?
So you make an aggressive bid. It seems that not making a bid has no upside and a real potential downside, while making a bid has no downside and a chance of an upside. The customer thanks you and promises to get back to you. But he doesn’t.
What might you have done differently? You could have bid lower, but there’s no guarantee that would have worked any better. That’s not a real solution.
The problem with the strategy was more basic. Your aggressive bid no doubt helped the customer get a lower price from someone else. That was the likely