Overseas buyouts reveal a premium for pride
A recent management study suggests that on an average, firms from developing countries bid higher than counterparts to acquire companies in developed nations – possibly like the scene in Bollywood classic Deewar, where a newly rich Amitabh Bachchan pays a premium to buy a building where his poor mother was a construction worker.
In the world of hardnosed business, does pride have a price? Did Tata Steel pay more than it should have when it went for Corus – simply because it was the former British Steel that brought in some political pleasure?
Evidence suggests that one reason for a higher premium is that some of the high-profile acquisitions are accompanied by nationalistic and political considerations.
According to a research work done by Ole-Kristian Hope and Dushyant kumar Vyas from Rotman School of management, University of Toronto, Canada and Wayne Thomas from Michael F. Price College of Business, University of Oklahoma in the US, “deals accompanied by national pride considerations on average result in higher premiums.”
In fact excess media coverage and bid premiums are positively related as well, reinforcing results using the direct measure of national pride, says the study.
Some of the bids originating from developing countries have been accompanied by huge media frenzy, political interference and nationalistic talk (both in acquiring and target companies).
This happened when Unocal was courted by China’s CNOOC, and there was also media hype in the United States surrounding the acquisition of Peninsular & Oriental by Dubai-based DP world.
In France, xenophobia marked the acquisition of steel giant Arcelor by Mittal Steel, and there was a perceived national pride consideration in Tata Steel’s acquisition of U.K.’s Corus.
“While these deals are examples of increasing financial power and confidence in the bidding countries, it remains an open question whether these companies bid higher (relative to companies from develop countries) in their quest for international expansion and perhaps national glory,” suggested the paper.
It may be recalled that in the battle for Corus, the Tatas upgraded their bid by 33 per cent to 605 pence a share from 455 pence per share (thereby increasing the value of the company to a little over $12 billion from $8 billion).
After the Corus deal, Ratan Tata had said, “We all felt that a loss would go beyond the group and it would be an issue of great disappointment in the country. So on the one hand, you want to do the right thing by your shareholders and on the other hand, you did not want to lose.”
However, the report said that it was difficult to discriminate between rational and irrational expectations in measuring the value of pride.
The research was based on sample of size of 295 bids in which the bidders were from developing countries while the target was located in the developed countries.