Negotiations 246

Capital Mortgage Insurance

Group Position Paper 1 Arin Halicki Amit Shah Helen Kim Satish Ramachandran 10/31/08

Overview Capital Mortgage Insurance Corporation (CMI) sells insurance to lenders protecting against mortgage default losses. They are a wholly owned subsidiary of Northwest Equipment Corporation. Following their acquisition in 1978, CMIs goal has been to rebuild their business and diversify their services. The Senior VP and Treasurer at CMI, Jim Dolan, discovered that corporate employee transfers will be a source of stable business and profitability for a long time to come (Lewicki 577). Merrill Lynch (ML) holds the lions share of the relocation services market. In alignment with their vision of growth and diversification, CMI sees value in entering the relocation services market. Entry could round out their overall service offering and allow them to better compete with ML. Thus the CMI vision to create a residential real estate financial services company (Lewicki 576) was born. Frank Randall, the President of CMI started looking for potential acquisitions. He contacted, David Osgood, executive director of the Metropolitan Realty Network. MetroNet facilitated referrals of relocated homebuyers with brokers in the new locations. They also believed that employee relocation services would be a source of stable income once a broker establishment was achieved. The companys current relationship with a Chicago-based relocation and third party equity firm Corporate Transfer Services (CTS) had not paid off to date. After sharing the CMI vision with Osgood, it became apparent that shared interests between CMI and MetroNet aligned. A potential deal could come about through CMIs acquisition of CTS while leveraging a relationship with MetroNet. CMIs proposition was made to and accepted by the MetroNet Third Party Equity Committee on March 1st. With the committees approval, Randall and Dolan began a series of negotiations with CTS in March and April. CMI sees a lot of value in the alliance with well-connected Eliott Burr, a CTS executive, and his team. CTS is also eager to be acquired, but is concerned about their ownership stake postacquisition. Despite candid communications between the teams about CTS operations, CMI is hesitant about the value of the acquisition offer and how it will affect the relationships between all players including MetroNet. The teams will meet on May 24th to review and negotiate CMIs proposed offer of acquisition. Negotiation Interests, Powers, and Positions CMIs primary interest is to expand their financial services capabilities and build a strong network that can rival Merrill Lynch. In order to do so, their most important goal is to acquire CTS at a reasonable price to fulfill the vision as proposed to and approved by MetroNet. A secondary goal is maintaining key management personnel and cementing a relationship with Elliot Burr. Preservation of good relationships with the CTS owners makes a collaborative strategy more effective to implement for the long run.

If a deal is not reached, CMIs BATNA would be to either build a relocation services inhouse or try to acquire a different company. As there are currently no other known targets for the latter, and the former could be expensive and time-consuming, a negotiated deal is the strong preference. CMI has some negotiating power because they are aware that CTS is struggling financially, and are desperate for a buyer. This desperation hurts the reputation of the owners motive in the negotiation. CMI also has power from their vision for the future. They have a concrete vision, buy-in from MetroNet, and are leading the way for independent parties to work together and rival Merrill Lynch. Capital Mortgage Insurance Company (CMI) Reservation Price: $1.02M ($600K over book value) Target: $420K (book value of CTS) Opening bid: $820K ($400K over book value) Corporate Transfer Services (CTS) Reservation Price: Unknown by CMI Target: $5M+ for 80% ownership

On the other side, CTS primary interest is to sell the company for as much money as possible. The owners personally invested a great deal of money and time into the company, and would like a return on their investments. They also have some interest to sell the company quickly, as it continues to be a drain on their resources. To ensure their returns CTS would like to retain partial ownership after the acquisition. This could be a lower priority interest that may be a bargaining chip in a collaborative negotiation. CTS BATNA would be to either find a new buyer for the company or try to fix the company and invest more time and money into operations. Currently there are no other known interested buyers and CTS has been unsuccessful in efforts to turn the company around to-date. Therefore, CTS must have a strong desire to forge a deal. CTS primary source of power is their strong internal network. Second to this is their influence over MetroNet due to CTS members serving on the board of directors. If the CMI-CTS relationship were to fall apart, CTS has the potential to persuade MetroNet to no longer support CMI. Lastly, they know CMI publicly committed to acquiring CTS in an approved proposal. There is pre-negotiation pressure on CMI to deliver on their proposal commitment. CTS negotiators know that CMI is as desperate to buy as they are to sell. Proposed Negotiation Solution For a successful collaborative strategy there must be a high degree of trust, openness and effective communication between all parties. Furthermore, CMI and CTS must be committed to understanding each others needs and show sincere flexibility in their approach. In addition, each party must be willing to redefine its perspective knowing that the whole can be greater than the sum of the parts if they could implement the strategy successfully. A successful acquisition of CTS by CMI is desired for following reasons:

 CMI must grow their existing business by providing loans to additional high-ratio loan clients. Thus they need access to the benefits of the MetroNet old boy network. CMI could make more revenue for their mortgage insurance business without significantly expanding their cost structure According to a consultants report, the success of a relocation business depends on the ability to provide services at lower cost than if clients did it themselves. Consequently, it is very important for CTS to offer services at a moderate cost. The more services offered within their company at an optimal level the more possible revenue per customer. Since CTS was an important source of real estate sales commissions for the Burr and Lehman partnership, it is critical for CMI to ensure similar opportunities for those partners in the newly merged entity. Doing so will maintain good relations with Elliott Burr the networking mastermind who will bring in a stream of new business. Here is a three-pronged strategy for collaborative negotiation based on 1.10 Implementing a Collaborative Strategy (Lewicki 117) that will ensure CMI works towards a win-win solution. Focus on the relationship as well as the outcome: Agreement on a price that is acceptable to CMIs parent corporation and all key partners of CTS is important. However, it is critical for CMI to not be outcome focused during this negotiation. CMIs executives have a good relationship with Mr. Burr. They must ensure that even if the negotiation is not concluded in anyones favor that the relationship with him is unharmed. This will enable CMI to work with CTS and MetroNet in some fashion in the future to grow CMIs insurance business. Define the problem from CMIs perspective: Even though CMI had $9 million approved from their parent company for expenditure in the acquisition, CMI did not want to spend more than $600K+Book Value of CTS for 100% ownership of CTS. On the contrary, CTS believes they are worth $6.25 million; $5 million plus an 80% stake. Furthermore, it seems some of CTS executives are more interested in getting their initial investment back rather than competing with ML in the employee relocation business. Clearly define possible alternatives: Since both parties are on opposing ends of a price for CTS, CMI should come up with alternative offer configurations. It is very important to ensure that these alternative configurations take CTS interest into account without losing CMIs strategic advantage or compromising their vision to build a diversified financial company. Following are some alternatives that could address the concerns of both parties. 1. Acquire 80% of CTS at $600K + Net Book Value. Include the option to buy the remaining 20% at a preset price if the newly acquired firm meets certain financial objectives.

2. Pay a little more than $600K+ Net Book Value to CTS for 100% of the company, but in return demand guaranteed access to various MetroNet clients for promotion of CMIs insurance business. 3. Pay more than 600K+Net Book Value (by tapping into $9 million for capital expenditure), but in return, make legal contracts to ensure CTS partners invest in expansion of business through equity or debt investment. After considering a solid strategy aimed at collaboration, CMI could start out the May 24th negotiation with CTS and talk to the following points: Present research on CTSs operations and try to agree on valuation metrics. Elaborate on CMIs vision of the complementary mortgage services company and how it can grow to rival Merrill Lynch. Start with the $820K offer ($400K over book value), explain with confidence that CMI will turn CTS around. Reassure the CTS partners about the security of their personal investments. Explain Dolans ROE projections created for the MetroNet Third Party Equity Committee meeting to CTS.