The Hindu Business Line : Will the winner's curse befall the Corus deal?

That, as you may remember, was about the 99-year-old Tata Steel's announcement of the Rs 36,000-crore ($8 billion) takeover bid for the UK-based steel-maker Corus.

At 455 pence per share, which Tata was offering to Corus shareholders, the buy was to be at a 26 per cent premium to the 12-month average price of Corus. Costly bid, shrugged off some; right price, said some. But there were also those who complained that the offer was too low. And they were eagerly looking around if a better bid would come the Corus way.

Yet, as if to go with smug jubilation closer home — on how the Tata-Corus episode had taken the Indian aggression to a higher level, in the overseas M&A (merger and acquisition) scene — it was all steely calm for a few weeks... At least till Brazil's CSN (Cia Siderurgica Nacional) threw its hat in the ring on November 17, offering to buy Corus at 475 pence per share.

With a counter-bid pushing the Tata House into reconsidering its options, the name of the tussle now on in the corporate world is bidding war, heating up by the hour.

Already, it is predicted that "Severstal could enter bidding war for Corus," as www.hemscott.com says. And `Corus jumps on bid war hope,' reads a headline of Bill Condie's story on www.thisismoney.co.uk, dated November 21. "Corus shares closed at 502p yesterday as investors warmed to the prospect of a protracted bidding war."

Meanwhile, a number of leading fund mangers are expected to be watching the bid situation at Corus carefully, `having built up stakes for their funds,' as Charlie Parker forecasts on www.citywire.co.uk.

What is bidding war?

Bidding war, for starters, is "competition between prospective buyers successively offering more for the same asset," as www.amex.com explains. "A situation in which buyers compete by offering higher and higher bids for the purchase of something such as a company or a house," defines Encarta. With a `relevance' of 100 per cent on Wikipedia, though, one gets `Burial Plot Bidding War,' the first release by New York native metalcore band `Every Time I Die.'

Bid or the auction, as a method or purchase or sale is important to the M&A practitioner for three reasons, says Robert F. Bruner in Applied Mergers & Acquisitions,' from Wiley (www.wiley.com). First reason is that auctions are widespread in business, in one guise or another. Examples that Bruner cites include `control contests (such as hostile takeovers),' privatisations of public sector enterprises, `rights to assets created by regulation such as import quotas, pollution rights, or airport time slots,' and `agricultural products such as raw tobacco in North Carolina and cut flowers in the Netherlands.'

Second reason why auction is important, according to Bruner, is that this is a sibling of `negotiated transactions;' so, mastery of M&A demands an understanding of `the process drivers of transactions such as auctions.' And third, "understanding the economic implications of auctions is vital to mastering the subject of hostile takeovers, the source of the most visible, contentious, and high-stakes transactions.'

Typically M&As go through the negotiation route, which is notoriously secretive, exclusive, and slow. In contrast, auctions can be fast and open, even as rivals outbid one another. "Competition among bidders helps realise higher prices for sellers in auctions as compared to negotiated transactions," says Bruner's book.

What should the shareholders look for?

When bidding wars rage on, what should the shareholders look for? Girish Vanvari, Executive Director, KPMG, Mumbai, says that to shareholders of the target company, two things are important. "One, the unlocking of value, which is directly proportional to the bid amount. And two, future value creation." The two may not move in the same direction, cautions Vanvari. "If the deal has been financed through debt that sits in the books of the target company after the merger, there is a possibility of value destruction," he explains. "In summary, for shareholders seeking exit, competitive bidding certainly enhances value. However, the same may not hold true for the long-term investors."

What should the shareholders of the bidding companies look for? Vanvari is of the view that the synergies, which the business combination could generate, are key. "The success of any acquisition would depend upon the bid premium vis-à-vis strategic synergies."

Lessons of economics

The avid may like to read Paul Klemperer's July 2000 paper titled `Why every economist should learn some auction theory', on www.ssrn.com. "Those who haven't imbibed auction theory are missing out on a potent brew," he begins. With examples on `litigation systems, financial crashes, queues, rationing, wars of attrition, valuing new consumers and e-commerce,' Klemperer argues that auction theory is central to economics. "While auction theorists are justly proud of how much they can teach economics, they must not forget that the classical lessons of economics continue to apply," he concludes.

One such lesson is about the risk of the `winner's curse,' with the winner overpaying to acquire a company at any cost, in a fit of `deal frenzy.' Writes Bruner, citing published studies, "Evidence of winner's curse has been found in auctions for publishing rights, offshore oil leases, baseball players, uncertain technology, and takeovers."

Frenzy is visible in the steel camp. CSN is reported to have picked up more than 13 million Corus shares for prices up to 475 pence, on the day of counter-bid. `CSN working at top speed on Corus bid,' writes Michael Harrison on November 21, in The Independent.

A war worth watching, therefore, for the rest of us.

The phrase `bidding war' draws more than 2,200 finds on Google News, beginning with `CSN ready for bidding war over Corus,' as Forbes reports `3 hours ago', citing Daily Telegraph. "Spanish Primera Liga club Real Madrid's TV rights are the subject of a bidding war between Rupert Murdoch, pay-operator Sogecable, free-to-air network Telemadrid and the MediaPro agency," informs www.sportbusiness.com. "Citigroup wins China bank bidding war," says Banking Business Review. "BoSox win Matsuzaka bidding war with $51.1 million offer," notes Hamilton Spectator, Canada. Also, catch up with `Bidding war for Beckham' in Daily Telegraph.

ZeroBase@TheHindu.co.in

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