Microsoft and Yahoo: Where Were the Mediators?

David Hoffman in the 5/12 Christian Science Monitor: "When Microsoft CEO Steve Ballmer met with Yahoo CEO Jerry Yang earlier this month, what kept them from making a deal? With Microsoft offering $33 per share for Yahoo's stock, and Yahoo willing to take $37, was there truly an unbridgeable gulf? The $4 gap seems trivial in comparison to the potential value of the deal. So did Microsoft and Yahoo walk away from a deal that would have made both sides better off? This type of bargaining failure is hardly rare – businesspeople frequently report deals that have come within inches of closing, only to slip away at the last moment, costing their companies plenty.

In the world of litigation, settlement gaps are routinely bridged with the help of mediators. In the world of foreign policy, mediation – sometimes called "shuttle diplomacy" – is used extensively to resolve conflict. Why, then, are business transactions rarely mediated?

One theory is that the functions that mediators perform are already handled by transactional lawyers and investment bankers who work hard – and are handsomely rewarded – to close deals. The problem with this theory is that the lawyers and investment bankers often approach the negotiation from a partisan perspective in order to prove their loyalty to their respective clients.

A more promising explanation is that when conflicts arise – as in a potential hostile takeover situation such as the Microsoft-Yahoo negotiations – the parties reject compromise because they see the world through a distorted lens. Conflict can cause "reactive devaluation" (a negative assessment of a proposal because it comes from an opponent). Neuroscientists tell us that conflict triggers some of our most primitive reactions – a fight-or-flight response – as opposed to the collaborative impulse required for dealmaking.

It's not surprising, then, that people – especially in business settings, where egos, competition, and high stakes collide – are unlikely to opt for mediation unless they are forced, or strongly urged, to do so. In the world of diplomacy, it is often the superpowers that intervene when smaller nations quarrel, and court cases are often mediated because a judge insists on it. Indeed, Microsoft mediated its antitrust dispute with the Justice Department only when the court ordered it. In the setting of mergers and acquisitions, however, the key difference is that there is no outside power that can insist on mediation. Accordingly, it is often up to boards of directors or shareholders to push management to mediation..."

The ways that people negotiate are very tied to their cultures, and unfortunately in our culture the use of a third party to assist in a negotiation is frequently cast as a sign of weakness. The notion that Steve Ballmer would have assented to the involvement of a mediator in the negotiation is quite a stretch. But David makes some very strong arguments in this piece.

I'd love to see the conflict resolution field put more energy into promoting dealmaking mediation. I think in some contexts it could prove invaluable, and word could get around.