Game theory may help Tata Steel counter CSN !

Source: Times News Network, Shihir Prasad, Thursday, November 23, 2006

When the board of Tata Steel meets on Thursday, the foremost issue on the agenda would be to discuss an effective counter strategy to the rival bid of Companhia Siderurgica Nacional (CSN) for Corus.

How should Tata Steel respond? CEO B Muthuraman, who is himself a believer in game theory, could easily fall back on some of the wonderful frameworks and concepts used by strategists around the world.

Now, here’s the possible scenario: Since the deal has now gone “in play” and cannot be concluded in a clinical manner, this is effectively an open ascending bid auction now. In layman’s language, that’s exactly the way all art auctions are conducted.

In such situations, experts reckon that Tata’s best bet is to keep bidding, in as small an increment as possible, till the bid reaches the value that the Tata Steel places on Corus. Eventually, as the bidding progresses, there’s every chance that one of the bidders will drop out.

“The final bidder might bid slightly more than the last bid and win, even though his own perceived value is much higher,” says Ranjit Shastri, managing director, PSI, an investment advisory firm who is also an applied game theoretician.

Like in any auction, Tata would have to be aware of the winner’s curse. Too high a bid might get them Corus, but could destroy the stock price of the combined entity and also force them to increase the leverage to fund the deal.

“If Corus is genuinely worth more to CSN than to Tata (because of greater synergies with respect to Corus), then CSN could safely bid at a price which would be foolish for Tata to match,” says Mr Shastri.

CSN has 3.8% of Corus or 33856936 shares. Every 10 pence increase in Corus’ price gets CSN an extra £3 million. “If CSN can get a $50-$100 million in this bidding game then that’s a fair bonus for their managers’ hard work!” says Mr Shastri.

This raises an interesting question: Is CSN playing the game only to be “paid away”? In the past, corporate raiders like T Boone Pickens and Sir James Goldsmith have used this tactic quite effectively. Goldsmith, for example, made $90 million from the Goodyear Tire and Rubber Company in the 1980s in this manner.

Back home, raiders like Arun Bajoria in Bombay Dyeing and Abhishek Dalmia in Gesco have used the same ploy.

Hence, such a tactic wouldn’t be very far from CSN’s mind. A little cash and a bit of fun in making the life of a rival miserable isn’t beyond CSN. Interestingly, ever since the talks of the merger broke out, the stock prices of the two companies have headed in diametrically opposite directions. This fact will definitely weigh in the mind of Tatas.

“If CSN asks for a fee (in other words, a goodbye kiss), it might be something less than what they think Tatas’ maximum additional bid might be. In other words, if they think Tata might bid another $xm to buy Corus, CSN might ask for a fee of $x-1m to walk away,” says Mr Shastri. It is entirely possible that CSN may be looking at this strategically and then of course they will not budge.

If CSN stays put, can Tata make their life equally miserable? Possible — just align forces with chaps like Severstal and put CSN in the cross-hairs. “It might be possible for Tata to combine with another company to launch a takeover of CSN, which is currently competing for Corus. Even if Tata has no intention of buying CSN, the Brazilian firm may drop their bid for Corus as a way of paying a suitor to leave them alone,” says Shastri. That would be audacious, but perhaps imprudent.
If the bidding goes out of control, Tata would do well to simply walk away from the deal. A little embarrassment, a little speck of dust on its ability to keep its commitment is worth it if shareholder value does not get eroded. As they say: “Be careful what you wish for, you might just get it.”