The Financial Times reported this week that AIG has reopened talks with MetLife for the sale of AIG’s American Life Insurance Company (Alico) subsidiary. Reportedly, AIG hopes to raise “more than $15 billion” to help repay the $80 billion in bailout funds it has received from U.S. taxpayers.
The article also mentioned MetLife had previously offered $11 billion while AIG had sought $20 billion. Assuming MetLife made the first offer, what negotiation lesson does this illustrate?
That the party responding to a first offer can select its counteroffer so the center of the two parties’ starting points is its desired end point. Here, the center of the two offers would be $15.5 billion, which is about what AIG reportedly hopes to obtain for Alico. This tactic, called bracketing, takes advantage of the expectation that the center of both sides’ initial offers is often perceived by the parties as inherently fair since it means both sides will have moved the same amount. As a result, negotiators have a strong tendency to move to the centerin negotiations.
You should always consider the advantages and disadvantages of making the first offer. While there are numerous advantages to making it, the fact that the party going second can often bracket your first offer and create a center which is more favorable to them is a potential disadvantage.
For a comprehensive discussion of whether or not to make the first offer, sign up for a free trial of my ExpertNegotiator Planning & Management Software to access the online version of my book, Gain the Edge! Negotiating to Get What You Want (St. Martin’s Press 2004).