How Much is That Steel Mill in the Window?
photo by Till Krech
If pride often goeth before a fall, it also often comes before profit. It has long been observed and measured that more often than not, acquiring companies overpay when they bid for other companies. The personal pride at stake in winning a bid invested by those who run the acquirer often account for more of the acquisition price premium than the synergies that are supposed to come from a merger.
But it is becoming apparent that national pride is an even costlier luxury than personal pride in takeover situations. And at the top of the pride price scale is the national pride at stake when a developing-country company acquires one in a developed country. Until recently that was not much of an issue. But the past three years or so have seen a sudden rise in the number and profile of acquisitions by developing countries, poor as well as rich. China, India, Mexico, Brazil and Dubai have all been hitting the headlines with billion-dollar bids for established developed-country companies. Anecdotal evidence has suggested that they have been paying bigger than ever premia for these takeovers – premia which may make sense at one level, corporate or personal, but make scant sense when viewed against longer-term national development goals.
Now the anecdotal evidence has been backed up by research by three academics, Ole-Kristian Hope and Dushyantkumar Vyas of the Rotman School of management at the University of Toronto, and Wayne Thomas of the University of Oklahoma College of Business. They have just published their findings in a paper: “The Cost of Pride: Why do firms from Developing Countries Bid Higher?”
It was a matter of Japanese national pride back in 1989 when Mitsubishi Estate acquired the New York Rockefeller Center, a name and building symbolic of American capitalism itself, and accorded the status on a National Historical Landmark, and Sony was buying up Hollywood. By the same token some Americans felt their nation had been humbled and Congressmen were up in arms. Meanwhile the vendors were laughing all the way to the bank. In a repeat of buy-high sell-low Mitsubishi sold it in 2000.
Those earlier exhibitions of national pride were mild compared with Indian outpourings when Tata Steel bid top dollar for the British/Dutch steel combine Corus – an acquisition which came hard on the heel of the Indian-born Mittal family’s acquisition of Arcelor, Europe’s largest steel group.
Whether or not the Tatas felt a need to keep up with the Mittals, they were certainly driven by national pride and egged on by a media which gave blanket coverage to the bid, regarding it partly as a turning of the tables on the British former imperialists and partly as a symbol of India’s revival and new global role. The bidding for Corus has been started by Brazil’s CSN and to win Tata ended up paying $12 billion or a 68 percent premium to the pre-bid price.
Ratan Tata, as quoted in the paper, acknowledged as much afterwards: “We all felt that to lose would go beyond the group and it would be an issue of great disappointment in the country,” he said. “So on the one hand you want to do the right thing by your shareholders and on the other you did not want to lose”.
The nationalistic instinct was catching. Two weeks after the Tata buy, the other big old name in Indian business, the Birlas, were showing they were not going to be outdone. Their Hindalco bought Canadian-listed Novelis, formerly an Alcan subsidiary, for $6 billion or a 24 percent premium to the pre-bid price to become the world leader in rolled aluminum production.
Needless to say, vendors can spot such national pride considerations from a distance, which increases their own leverage. Vendors almost by definition are those who reject national pride considerations in favor of what they see as their own or their firm’s interests. (Nor does this seem to apply just to vendors in developed countries. The just-announced acquisition by Japan’s Daiichi Sankyo for control of Ranbaxy Laboratories from its Indian family founders is a case in point).
Interestingly, the academics’ paper finds that developing country firms pay big bid premia when buying in developed countries but not when they are bidding in other developing countries. They cite Malaysian acquisitions in Indonesia as an example (though the recent top-dollar Malayan Banking purchase of 56 percent of Bank International Indonesia (BII) for 4.6 times book value would seem not to fall into this category).
Are these exercises in national pride beneficial, or a cost which developing countries can ill-afford? Or are they simply bad business as the Japanese purchases in New York and Hollywood proved?
They certainly cost a lot. The paper finds that “Everything else remaining the same, the premium associated with national pride bids is almost twice that of the premium associated with non-national pride bids.” Using the authors’ conclusion one could put the cost of national pride to Tata shareholders at at least US$3 billion and that to Hindalco ones at around $1 billion.
The paper however notes that there may be offsetting gains. Governments may appreciate the nationalistic spirit and grant the acquirer favors such as tax advantages, or contract preferences. In many cases, in developing countries there are also links between bidders and politicians. There are also gains in goodwill among national audiences, and lower capital costs in international markets if larger size leads to better foreign recognition. There may be gains in acquisition of technology which would otherwise be unavailable. National prestige is thought to have its own rewards.
The paper does not however address the issue of the macroeconomic consequences of expensive acquisitions. As noted in an earlier article (Asiansentinel February 7,, 2007) India is a capital-short nation with a steel output one ninth that of China. Should it have paid over-the-odds for a company based in low-growth Europe when India’s own record of investment both in manufacturing and steel-using infrastructure was so weak? The record of 100-year-old Tata which was expanding by costly acquisition was a contrast to Korea’s Posco, which was less than half its age and had become the world’s number three producer and a technology leader, without having to make huge and costly bids. Indian media seem to have totally missed this apt comparison.
The recent global takeover fever was everywhere propelled by cheap money. But it was given extra fuel by the national pride of companies and countries which, perhaps for the first time, had access to global liquidity. But it’s a liquidity which can propel – or blow up in the face of those building instant global corporate empires.