Cerebrus Capital Management & United Rentals Inc.

Posted on December 16, 2007 | Filed Under Tactics | Leave a Comment

What do you do if you think you agreed to pay too much?  Let’s turn to the financial pages for an example.  But before we begin – we don’t have any inside knowledge about this deal, and we don’t know which side is telling the truth.  It just makes for an enlightening negotiation topic.

In many recent financial articles, it has been reported that Cerebrus Capital Management wants to either renegotiate the terms (including price), or back out of their agreement to buy out United Rentals Inc. (URI).  Cerebrus was willing to pay a $100 million “breakup fee” specified in the agreement.  Good money, but the buyout price was $4 billion.  What happened? 

URI is suing Cerebrus for specific performance on the contract (which essentially means forcing them to do what they contracted to do). In addition, URI alleged that Cerebrus intentionally leaked a letter that said Cerebrus was going to renegotiate, thus causing URI’s stock to drop by more than 30% – which in turn made the old price Cerebrus agreed to a lousy deal.  Two days after that, Cerebrus made a significantly discounted buyout offer, and (reportedly) called it “attractive”.  Ouch.

It is now in the courts.  One thing is predictable.  No matter how it turns out, the future is gloomy. 

(Insert “allegedly” appropriately in the following – basically everywhere.) If Cerebrus leaked, and the buyout price does come down, was this a good tactic?  After all, it’s a $1.2 billion dollar difference.

Our experience shows that buyers and sellers in commercial transactions see these things differently in one key way.  Buyers are more likely to use tactics and get away with it.  Sellers who get caught in an “iffy” tactic are much less likely to get away with it.  Why?  In either case, the side that gets caught in a tactic suffers a tremendous loss of credibility, and of “negotiation capital”.  Negotiation capital can best be described as the other side’s willingness to negotiate with you.  It spends like capital, and comes from an account that can be depleted severely.  Caught in a nasty tactic?  You just emptied your account, and every step in your future negotiations will be harder.   

But why is there a difference between a buyer who gets caught, and a seller who gets caught? Because in the minds of most buyers, there is always another seller.  But in the minds of most sellers, every buyer could be the last one.

We don’t recommend tactics like these – for buyers or sellers.  Your reputation is too hard to get back.  Most of the time, we want a client / supplier for the long term.  Learn to negotiate on the merits of the transaction, and you’ll be more successful. (TD)

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