Friday, August 26, 2011

Why We Turned the Tables on Our Bankers

In the credit facility syndication process, finalization of the credit agreement usually occurs about ½ day prior to closing the transaction.
From a game theory standpoint, this is not ideal. If we imagine a decision tree with two outcomes, agreement or no agreement along with their associated payoffs, we can understand why this is the case.
If a facility has been worked on for several months, everyone from the janitor to the Chairman of the Board is aware of its occurrence, and thus a breakdown in the deal is highly public, and due to the importance of credit to the firm highly scrutinized. “Did you guys really need to hold out for e-mail notification over fax?”
Near the end we are therefore at our lowest in terms of bargaining power, since the bank is aware that we do not have much other choice at that point.
Having experienced this a couple of times, we experimented with changing the process. Rather than follow the standard timeline, we insisted on negotiating the agreement first, prior to engaging the syndication agent.
This was the point of our greatest negotiating leverage - we could in fact still walk away from the deal without the difficult repercussions.
The terms and conditions in that agreement were much better than the ones obtained in our prior deals.
Sometimes that theory really works!
I would love to hear your thoughts about successful uses of Game Theory or your stories on this topic if you have them.
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