Coke and Honest Tea

X= sales we could’ve gotten onour own without help\

For sales up to x, you should pay the market multiple

For sales above x, you should pay ½ the market multiple

What is the value Coke brings?

-create sales, more than what we could’ve done on our own

-get rewarded for the value we create and the extent that the 2 of us come together

How much could you do without our help

2 points:  

-Coca Cola provides us data on a lot of other deals to see an appropriate market multiple

-provide Coke with how some-store sales were increasing

What were the new markets for honest tea?

Do we really want to pay more for the sales we made possible?

Counter:  without our product, your help wouldn’t have had something to create more sales; what we should do is too split those  sales.  In 3 years to purchase

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Coke:  40 billion

Honest Tea: 20 million

Proportions:   2,000: 1

Honest tea: 4,000

Coca Cola: 7.99million

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19 cents/bottle vs 11 cents/bottle

8 cents/bottle savings X 100 million =  $8 million/year saved

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$7 million Coke  to $1 million Honest Tea split?

No!

4 million Coke  & 4 million Honest Tea

@ most big companies there is 1 central group that does all the purchasing and the operating units are changed an annual fee to cover the overhead costs of the purchasing group.

2007 Marius Copper   bhp billion   → Rio Tinton

170 Billion  +  100 Billion

3.7 billion/year in value creation

How do you divide it?

View 1: proportion to market caps

bhp :  170B       Rio Tinton:  100B

View 2:  divide 50/50

                       1.850 Billion   &    1.85 Billion

Bhp billiton             +            Rio Tinton

    56%                                       44%   + 45 billion premium

Merger denied for anti-trust reasons

• How do we share 3.7 billion dollars a year.

Triangle Route/Ultimatum

Triangle Route (SF - H - NY)  $2,818

Triangle Rule (SF - H - NY) =  $2,818

    Savings of pie is 1,000

Round trips (SF - H) + (SF - NY) = $3818

Pie =>  save $1,000

ULTIMATUM #1

NY ultimatum to Houston   ->  HST pays $1332 value

   ->  Should HST says Yes to 1K, 1.1K, 1.2k, 1.3k???

   ->  HST <=$1331

Ability to make an ultimatum gives you power

iNSTEAD OF PIE DIVIDED 50/50, NY GETS 99.9% OF THE PIE

   -NY shouldn’t be so greedy

   -NY → 99.9% of pie

   -only cost HST $1  and to cost NY $999

ULTIMATUM #2

What NY should do?  Offer H $333 keep $667

   -big enough incentive

YES: pay $999   NO: pay $1,332

Version 2:  

Experiment offers 2 subjects a $100 if the 2 agree on how to divide it up

One side makes a proposal and the other side say yes/no?

I.e. 90/10 split

            Receiver says yes then she gets $10

            While proposer gets $90

    If they say no they both get 0

    Most people reject offers to small

Game as proposer

      2nd smallest be you’d be willing to accept as the receiver.

To put yourself in power of a negotiation is to put yourself in yourself in the place of making ultimatum

• Use with discretions
• No lopsided ultimatums
• Ultimatums are crutches in which people overuse
• Otherside will reject your ultimatum though it hurts them
• If it’s a real ultimatum you can’t back out.

When someone uses an ultimatum the best strategy is to push back and demonstrate that the ultimatum isn’t real or to recast it.

Avoid ultimatums with Salaries

• If you don’t give me 65K I won’t come to work for you
• If you offer me 65K,  I promise to come work for you

Firms shouldn’t make ultimatums

• 40s - 50s Lemuel Boulware a VP @ GE
• Few people believe 1st offer is your limit

Instransigent: completely unwilling to change, very stubborn

Discretion: speaking to avoid causing offense or revealing private info.

Never Say No

Never Say No!

If daughter joins the Math team…. What was her counter offer?

•    Benefit: Get a dog
•    Joined Math team

1. Think beyond immediate needs, think future
2. Never say no, let other side say no to you
1. Make an offer that the other side would reject that you’d be happy to take

  

Want to quit job,

     Come up with package to entice you to stay

     Let the firm say no to you

     On the other hand you were going to leave, but they may say YES

Adam McKay: prepared to quit, what would it take to stay at SNL?

       Come up with unreasonable demands

• Never going to another production meeting
• Budget for short films

     Lorne Michael (executive producer) said yes to all 5 of his demands

Came up with Funny or Die site which created Talladega Nights, Anchorman, and Step Brothers

*MORAL:  Don’t say no, let others say no to you     Think about what it’d take for you to say yes, and make that the counter proposal

NY to Seoul:  instead proposed price to take the trip

       12 hours ahead, if you there for dinner no jet lag

Cain and Able

Babylonian Talmud

A: It's all mine (3/4)

B: Half of it's mine (1/2)

proportional division

2/3

1/3

2 : 1 proportions

Talmud

3/4

1/4

3 : 1 proportions

Logic underlying solution:

The principle of the divided cloth

Cain vs Abel

Cain

100%
50%	50%

Cain & Abel

The solutions what has been conceded split by the other -half the amount is in dispute

Cain: It's all mine (3/4)

Abel: Half of it's mine (1/2)

Option 1

-Cain get’s half the cloth plus half of the disputed amount (77.5) so Cain gets 75%

-Abel only gets ½ of the disputed amount gets 25%

Split (33%/2) = 16%

Option 2:

-Cain concedes ⅔ conceding ⅓ to Abel

-Abel only gets ½ and gives ½ to Cain

16.7% of cloth in dispute = ((1/12) *2)

Cain gets 50% + 1/12

Abel gets ⅓ + 1/12

2/12 = 1/6

.66

.33

Why is Abel only asking for half the cloth?

If he asked for more he’d get more

*true under proportional division and principle of the divided cloth

2 Stages of negotiation

1. Making claims
2. Dividing things up once the claims are made

In some negotiations the claims are not negotiable

Sam owes money to two creditors

$100 to A $50 to B

Sam only has $100 dollars to his name.

Size of the debt is not in dispute

How to divided up his claims:  Owes $150 to creditors and has $100 in assets

Proportional division: split

66.7%

33.3%

Owed: $100   owed $50:

Principle of the Divided Cloth on this claim:

Creditor A owed $100

75%	25%

               The $100 creditor gets 50% plus half of the dispute leaving the other creditor with 25%

I don’t expect you to be convinced one approach is more reasonable than the other.

Say Cain and Able are fighting over $100.  Cain claims he should get 80$, leaving Abel with only $20.  Abel thinks he should get $60 while Cain gets $40.  According to the principle of the divided Cloth, how much money should Cain receive, in dollars?

Cain & Abel fight over $100

• Cain claims $80, leaves Abel $20
• Abel claims $60, leaves Cain $40

Talmund Rules:  What has been conceded cannot be disputed, the split comes with the otherside

$40 is in dispute:

Cain gets $40  +  $20  or $60

Abel gets $20  +  $20  or $40

Zincit Case

Zincit:

Used the data to obtain a patent of the use of zinc salts for acid reflux

One company wants to use the tablet as a competitor to Tums. The “Zums” team is not going to apply for FDA approval;

Dr. Hasan hired lawyer Sam Massey to help negotiate the deal. Hasan was more than a bit surprised (and pleased) when Massey came back with a $20 million all-cash offer.

The “Zincit” (pronounced Zinc-It) team has experience with the FDA approval process.

The process would likely cost $10 million, but since getting FDA approval would be a huge boost to sales, Zincit is willing to commit to the expense

Scenario 1

• FDA approval, the company expects to earn $200 million in total revenue
• $120 million in profits over the life of the drug
• 5% royalty (based on revenue) would be worth $10 million to Hasan

Scenario 2

• Zums offer, Zincit team has concluded Hasan's compound

• Zincit team has concluded Hasan compound only has a 1 in 10 chance of winning approval
• Zums offer: can't buy the license for less than 20 million dollars