I'd like to share with you, how I applied some of the lessons from the merger case to a negotiation in my own life. As some of you will know, along with being professor, I started a tea company. It's called Honest Tea. And eventually, after working at the company for ten years, we had an opportunity to sell the company to Coca-Cola. And I ended up being the one who was involved in those negotiations. So here are two stories from the negotiation. The first is a little bit embellished, and the second one is completely true. One of the things that Coca-Cola could do is help Honest Tea cut the cost of its bottles from $0.19 a bottle to $0.11 a bottle. That's $0.08 a bottle, and at the time, the company was selling 100 million bottles a year, okay? So that's worth $8 million a year. And the question is, who should get that 8 million? Should it be Coca-Cola, or should it be Honest Tea? Well, Coca-Cola might say we should divide this up in proportion to our sales volume. Our sales volume is $40 billion a year. Your sales volume is $20 million. Okay. Let's see. That's a ratio of 2,000 to 1. So, if we're gonna share that $8 million in proportion to our sales volume, Honest Tea, you can have $4,000 and we'll have $7,996,000. Well, as you might imagine, that didn't sound very fair to me. And so, it didn't even sound fair to Coca-Cola. Their response then might be afterwards, well, okay, you're right. Sharing it in proportion to sales volume, that's not really appropriate. We'll take 7 million. It's our purchasing power. You can have a million. And how is it that I could respond to that? Well, I think the right response is your purchasing power is great, but what you also need are people who are drinking this tea. Because it's only by putting your purchasing power together with the people who like this not too sweet organic tea, do we create the ability to save $8 million. And so, that's why we should split it 4 million, 4 million. Now, some of you will say, I'm negotiating here against somebody who is really quite powerful and I'm kind of the small guy in this. And therefore, you might expect Coca-Cola to come back with something like hey, we're Coca-Cola. For us, 8 million isn't even a rounding error on a rounding error. For you, 1 million really matters a huge amount. It's the difference between life and death. Therefore, you should be happy with a million. We'll take 7 million. Thank you very much. As I've said before, every argument about splitting the pie can be flipped. And so, how would you flip that one? Well, hey, Coca-Cola, you just told me you don't care. 8 million is a rounding error in a rounding error. So nobody will notice, if you don't even get it. Therefore, since we care so much, we like to have the 7 million, you can have the 1 million. And who will notice? So my point here is, you can't simultaneously argue that you should get a lot because you don't care. Because the response to that is, well, in that case, if you don't care, you should be happy with a little as well. Now, it turns out that that negotiation wasn't ultimately the way it went. Because in the end, Coca-Cola ended up purchasing the company. And so, we didn't have to think about how we divide the cost savings from their purchasing power. And this is the real negotiation, and here is where we really figured out how to split the pie. When Coca-Cola came to buy us, they wanted to buy us right away, but we weren't really ready to sell. We were having too much fun at the time. And so, we worked out an arrangement where they would help us right away, in terms of getting us access to the lower cost bottles, and to their unique and fantastically positioned distribution. But the problem was that, once they helped us get distribution, then our sales would go up. And they would rightly think, do we really want to pay more for the company, for the sales that we help make possible? And what's the counter to that? The counter is, well, without our product, your help wouldn't have had something to create more sales. And so, what we should do is split those extra sales that you made possible. And that's what lead to the ultimate structure of the deal, which is the following. In three years, you'll have an opportunity to buy the company. And what you should pay is based on the following. For sales up to x, you should pay the market multiple. And for sales above x, you should pay half the market multiple. And what is x? X is the sales that we could've achieved on our own, without your help. Okay. And why is this? It's because, what is the value that Coca-Cola brings to the table? It's the ability to create sales, more than what we could've done on our own. And so, we should get rewarded for the value that we can create, and to the extent that the two of us come together creates something much bigger and better. That's the value that we split. And so, I think it's truly the case that in the first hour of our negotiations, we agreed on the structure of market multiple up to x and half the market multiple there after. And there was certainly negotiations that followed, in terms of what's the right market multiple, and what's the right value of x? How much could you have done without our help? That's not something that we'll ever know for sure because in the end, we didn't run that experiment. But, it focused our negotiations on two points, one of which is really an empirical question. And Coca-Cola could provide us with lots of data of other deals to help us see what is an appropriate market multiple. And then in terms of what it is we could have done on our own, well, we could provide them with data in terms of how our same-store sales were increasing. How quickly we could penetrate new markets. What were the new markets we thought were ready for Honest Tea. And so, that is how you can use the principle of what is the pie to help structure what otherwise might be a very contentious and difficult negotiation.
