07 Odra (Budziak)

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Harvard Business School 9-895-006
Rev. August 27, 1996
 
Professor George Wu and Arnold Holle of The Boston Consulting Group prepared this case as the basis for class discussion 
rather than to illustrate either effective or ineffective handling of an administrative situation. 
Copyright © 1994 by the President and Fellows of Harvard College. To order copies or request permission to 
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permission of Harvard Business School. 
1 
Tomasz Budziak 
Tomasz Budziak sat in his office in the Ministry of Privatization waiting for the arrival of 
Hans-Hugo Miebach. Budziak, a 28-year old graduate of the Warsaw School of Economics, had been 
at the Ministry of Privatization for two years. Now, as Team Leader, Budziak was responsible for 
privatizing firms in several Polish industries, including the cement sector. Two months earlier, in 
October 1992, the Polish Ministry of Privatization had invited investors to submit proposals to 
purchase up to 80% of the shares of Cementownia Odra Spolka Akcyjna, “Odra,” a cement company. 
Although Budziak had received three serious bids for Odra, Miebach’s offer of 5 million Deutsche 
Marks (DM) for 80% of Odra was higher than the next best offer. Moreover, Miebach’s offer also 
included the best investment plan—Miebach guaranteed not only the installation of a 10 million DM 
BRAM system for the city of Opole, but also a 20 million DM conversion of Odra’s aging cement plant 
to the more efficient dry process. Miebach’s monetary offer and Investment Plan were clearly the 
best. However, Miebach had attached four conditions, which if totally inflexible, would make 
another bid preferable. Thus, there were several difficult issues that Budziak needed to iron out with 
Miebach before there could be any deal. 
Land for Quarry Expansion
Miebach had made it clear that his offering price of 5 million DM was conditional on his 
owning 45 hectares (ha) of land, enough land to operate the Odra quarry for another 25 years at 
current production levels. Budziak could understand Miebach’s position. Given such a large number 
of farmers, it would be extremely difficult to assemble all the necessary land. Even if Miebach could 
convince everyone to sell, there was still the matter of price. Odra had paid 20,000 DM per hectare 
for two hectares acquired in the spring of 1992. However, although farmland was currently cheap in 
Poland, Odra was only two kilometers from Opole, a city of 130,000, and land prices could easily 
triple in the foreseeable future. 
Miebach was concerned that he would be unable to obtain the land required to operate a 
profitable cement company. Without the requisite land, Miebach would have to employ dramatically 
more expensive methods of extracting limestone. Thus, Miebach had proposed the following scheme: 
after buying Odra, Miebach would go out and buy land. If he was unable to obtain 45 ha of land 
within the next two years, the Polish government would refund the purchase price, 5 million DM. 
Miebach’s concerns were quite reasonable. When Budziak had investigated the plots around 
the quarry, he had discovered that two of the eleven private plot owners were nowhere to be found. 
895-006 Tomasz Budziak 
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Thus, Budziak believed that there was a one in ten chance that Miebach would not be able to 
purchase the requisite land. In addition, however, Budziak had a very different concern: if Miebach 
found operating a cement plant in Poland problematic, then an alleged inability to acquire land 
would provide Miebach with an easy way out of the deal. Budziak was unsure of how he could 
protect the government against this possibility. One of Budziak’s advisors had suggested that 
Budziak acquire the land for Miebach. While such a scheme would address the problem of Miebach’s 
incentives, it was clearly infeasible ó neither Budziak nor the Ministry of Privatization had the time or 
resources to acquire land in Opole. 
Tax Holiday 
Miebach’s initial offer was conditional on the Minister of Privatization’s support of a tax 
holiday in the amount of his purchase price. Budziak believed that, with or without his support, 
Miebach was certain to receive the tax break. Of course, the size of the tax holiday was limited by the 
purchase price. Neither of the two ministers, Privatization or Finance, had any reason to reject 
Miebach’s application since it satisfied all of the relevant conditions of the tax law. Furthermore, the 
Ministry of Finance was unlikely to object to a 5 to 10 million DM tax exemption. On the other hand, 
Budziak did not think that he would be able to justify a tax exemption larger than 10 million DM. 
Just as important, neither Budziak nor the Ministry of Privatization would bear any costs, 
financial or political, in supporting a 5 to 10 million DM tax holiday. Nonetheless, Budziak had 
hinted to Miebach that supporting a tax break was politically costlyóafter all, Budziak had 
responsibility for privatizing other cement plants besides Odra and did not need to waste all of his 
political capital on this one small deal. 
Financial Warranty 
Miebach was demanding that the Polish government assume responsibility for all potential 
liabilities not on the company books. Naturally, Budziak was reluctant to offer such a “warranty.” 
After discussing the liability issue with Odra’s legal counsel, he concluded that there was a small 
chance that Odra would eventually have to pay the 1 million DM for work done on Odra’s apartment 
blocks. Yet when Zdzislaw Lukowicz, Odra’s plant manager, had informed Miebach that this 
likelihood was “quite low,” Miebach was clearly skeptical. 
However, Miebach had made an even bigger fuss about the possibility of additional 
liabilities, primarily environmental ones. Polish laws were changing all the time, and existing laws 
were sometimes ambiguous at best. Thus, it was anyone’s guess as to the extent of Odra’s future 
exposure. Budziak decided to consult a leading Polish legal scholar, who reluctantly gave him an 
assessment of the degree of Odra’s exposure. The legal scholar believed that there was an “excellent” 
chance that no other liabilities would materialize; a “small possibility” of another liability in the 1 
million DM range; and that it was “exceedingly unlikely” that Odra would be responsible for a major 
liability. However, in this improbable event, the liability would “certainly be in the millions of DM, 
and perhaps as high as 10 million DM.” 
Budziak thought that Miebach’s demand that the Polish State warranty all such liabilities was 
absurd. However, Budziak was open to the possibility of a cap on liabilities that were not currently 
on Odra’s books. In such a case, Miebach would be responsible for all liabilities up to the cap, with 
the government liable for amounts in excess of the cap. 
Tomasz Budziak 895-006 
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Import of BRAM fuel 
The final issue concerned the import of BRAM fuel from Germany. Miebach had noted that 
his offer was conditional on his ability to import refuse-derived fuel from Germany. Miebach was 
demanding a 3 million DM reduction in the purchase price in the event that the Sejm failed to pass a 
law allowing the import of BRAM into Poland. Budziak thought that the chance that such a law 
would pass was extremely slim, at most a 10% chance. It would be extremely difficult for the Sejm to 
pass a law allowing the import of trash into Poland. When Budziak had mentioned the political 
realities of importing BRAM to Miebach, Miebach had retorted that “BRAM is fuel and not trash.” 
However, beyond such rhetoric, it was clear to everyone that the economics of the deal would change 
dramaticallyif the law were passed. German municipalities would pay Miebach to process their 
trash, and Miebach could then use the BRAM to fuel Odra. In contrast, opening a BRAM production 
facility in Poland was unattractive to Miebach, since Polish municipalities were too poor to pay 
Miebach to process their refuse. Budziak’s advisor had prepared a rough calculation, concluding 
that the ability to import BRAM was worth anywhere between 3 and 8 million DM in net present 
value to Miebach. 
Final Thoughts
As Budziak waited for Miebach to arrive, he decided to review the situation. Quite simply, 
Miebach’s investment plan (dry process and BRAM facility) was not negotiable. Without the dry 
process kilns, Budziak could not imagine Odra competing against nearby Gorazdze. Nor would he 
be able to explain to Wladyslaw Olszewski, vice mayor of Opole, why he had been unable to make a 
deal with Miebach. It would be Budziak’s fault when Opole was overrun with refuse and covered in 
cement dust from the Odra plant. 
Fortunately, three bidders, including Miebach, were interested in Odra. The number of bids 
received on Odra had been disappointingly small. Budziak had expected twice that number. He had 
also hoped that a big player in the cement industry, a firm with deep pockets, would express interest 
in Odra. Luckily, Miebach knew neither of Budziak’s unrealized hopes nor the identities of the actual 
bidders. Still, Budziak wondered whether Miebach knew that his monetary offer was the best. 
In fact, Miebach’s financial offer was clearly the best, as was his investment plan. However, 
there was still the problem of Miebach’s four conditions. If Miebach dropped all four conditions, then 
Budziak would be prepared to sell Odra to the German for anything more than 3.5 million DM, the 
value of the next best offer adjusted for differences in the investment plan and other conditions of the 
offer. Yet if Miebach refused to compromise on all of his four conditions, then Budziak would be 
forced to choose another bidder, unless Miebach increased the purchase price to 7.2 million DM (see 
Exhibit 1, Example A, for valuation calculations on this and other potential agreements). 
Budziak thought it might be possible to get much more than the 5 million DM that Miebach 
was offering. For instance, 30-year-old wet process plants in Slovakia and Bulgaria had recently sold 
for 25 DM per ton of capacity on average, 16 million DM for a plant of Odra’s size (approximately 
600,000 tons of annual capacity). All these plants, however, came with at least 50 years of limestone 
deposits. 
Budziak’s boss had visited yesterday and instructed Budziak to make a deal as soon as 
possible. Even though Odra was small compared to plants in Gorazdze and Strzelce Opolskie, for 
which Budziak had bids on the table for more than 100 million DM, Odra would still be the first 
privatization in the cement sector. Budziak, too, wanted to make a deal this afternoon so that he 
could concentrate on selling Gorazdze and Strzelce Opolskie after Christmas. 
895-006 Tomasz Budziak 
4 
Exhibit 1 Valuation of Potential Agreements 
Two potential agreements are described below. Budziak’s “reservation price” of 3.5 million 
DM assumes that Miebach drops all four conditions. To calculate the surplus (how much better off 
Budziak is with the potential agreement compared to the no agreement alternative), an “unadjusted 
surplus” is first obtained by subtracting the reservation price from the purchase price. Next, 
adjustments in the valuation are made to reflect the actual resolution of each issue. The total 
adjustments are subtracted from the “unadjusted surplus” to obtain the adjusted surplus. 
Example A
Description of Potential Agreement 
Purchase Price: 11 million DM 
Land Guarantee: none 
Tax Holiday: Budziak does not support Miebach’s application 
Financial Warranty: none 
Import of BRAM: no guarantee 
 
Calculation of Surplus 
A. Purchase Price 11.0 
B. Reservation Price 3.5 
C. Unadjusted Surplus 7.5 (A-B) 
Adjustments 
Land Guarantee 0.0 
Tax Holiday 0.0 
Financial Warranty 0.0 
Import of BRAM 0.0 
D. Total Adjustments 0.0 
E. Adjusted Surplus 7.5 (C-D)
Tomasz Budziak 895-006 
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Exhibit 1 Valuation of Potential Agreements (continued) 
 
Example B 
Description of Potential Agreement 
Purchase Price 7.2 million DM 
Land Guarantee 5 million refund if Miebach is unable to obtain land 
Tax Holiday Budziak supports application for tax holiday 
Financial Warranty Polish Government assumes all potential liabilities 
Import of BRAM 3 million DM refund if Sejm does not pass law 
 
Calculation of Surplus 
A. Purchase Price 7.2 
B. Reservation Price 3.5 
C. Unadjusted Surplus 3.7 (A-B) 
 
Adjustments Notes 
Land Guarantee 0.5 .10 chance that Miebach is unable to purchase 45 hectares 
of land multiplied by 5 million DM refund 
Tax Holiday 0.0 
Financial Warranty 0.5 expected cost of financial warranty (given Budziak’s 
probability assessments of potential liabilities) 
Import of BRAM 2.7 .90 chance that Sejm fails to pass a law allowing import of 
BRAM into Poland multiplied by 3 million DM refund in 
that event 
D. Total Adjustments 3.7 
E. Adjusted Surplus 0.0 (C-D)
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Tomasz Budziak 895-006 
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NEGOTIATION FORM 
Tomasz Budziak 
 
Your Name: __________________________ Your Participant Number: __________________ 
Miebach Player’s Name: ___________________ Miebach’s Participant Number: ______________ 
Did you reach an agreement? Yes: ______ No: _____ 
If you reached an agreement, describe the structure of the deal on each of the issues. Then approximate the total 
surplus from the deal (i.e., how much Budziak is better off making this deal than his no agreement alternative). 
It may be useful to provide an approximate value for each issue, however, don’t get hung up on precise 
numbers! Feel free to make (and note) reasonable assumptions that affect the worth of your agreement. 
 Rough Values 
 
A. Purchase Price DM ______________ 
 
B. Reservation Price DM _____3.5______ 
 
C. “Unadjusted” Surplus (A-B) DM ______________ 
 
Adjustments 
 
D. Land Guarantee DM ______________ 
 
 
 
 
 
E. Tax Holiday DM ______________ 
 
 
 
 
 
F. Financial Warranty DM ______________ 
 
 
 
 
 
G. Import of BRAM fuel DM ______________ 
 
 
 
 
 
H. Total Adjustments (D + E + F + G) DM ______________ 
 
I. Approximate Total Surplus (C-H) DM ______________ 
 
Briefly, what two lessons from this negotiation seem most important to you personally? 
 
	Land for Quarry Expansion
	Tax Holiday
	Financial Warranty
	Import of BRAM fuel
	Final Thoughts