Real-Life Negotiations: T-Mobile’s Bid for MetroPCS
In Negotiating Rationally, Professors Max H. Bazerman and Margaret A. Neale maintain that in competitive bidding situations, often the buyer falls prey to the “Winner’s Curse.” In practical terms, this means that the winning bidder often ends up paying more than necessary – frequently more than the actual value – for the thing that s/he acquires.
Why would someone voluntarily pay more for something than it’s worth, you ask? Some common reasons follow:
- Bidders often don’t have enough information; therefore, they may overestimate the present value of what they’re bidding for.
- Acquirers frequently don’t consider that the other bidders may not have any more information than they do.
- Bidders may think the synergy created between something they already own and what they’re buying will make the acquisition worth the inflated amount they paid for it
- Fear of competitive offers often leads bidders to be content with less information than is truly needed for a thorough analysis.
Let’s examine these reasons within the context of a real-life negotiation situation:
Last week, T-Mobile announced its intent to purchase Metro PCS for the equivalent of $11.28 per share. Two days later, Sprint said that it may consider trumping T-Mobile’s offer. According to Pacific Crest analyst Michael Bowen, Sprint’s bid might value Metro PCS’ shares at something between $12.50 – $15.00 per share.
In February, Sprint considered buying MetroPCS at a price that, according to analysts, would have generated savings of $8 billion to $9 billion for the combined entity. This is much greater than the synergies expected from the deal between T-Mobile USA and Metro PCS, which are estimated to generate savings of $6 billion to $7 billion on a net present value basis. Ultimately, Sprint opted out of the deal in February, choosing instead to invest in its own network. But on the news of T-Mobile’s offer, they’re considering jumping back into the game.
It’s doubtful that either T-Mobile or Sprint has more information than the other regarding the true value of MetroPCS. What reason would MetroPCS have for giving more information to one than the other? It’s clearly in their best interest to let the bidding go higher. Is Sprint stepping in because it assumes that T-Mobile knows more than it does about the value of MetroPCS? If Sprint does make an offer, will T-Mobile fall prey to a similar, possibly erroneous, assumption and make an even higher offer?
What about the estimated savings generated from the synergistic value of the combined companies? In studies of past M&A’s, there’s no evidence to support that the excessive price paid was equal to the synergistic value. According to an article published in the Wall Street Journal in September 1981, approximately 1/3 of acquisitions prove to be failures; another third fail to live up to their expectations.
Often, bidders’ willingness to accept less information than they would have liked, stems from their fear of competitive offers. Is Sprint’s last-minute bid simply a case of “I didn’t want it before, but if you want it, then I want it, too, because I don’t want you to have it?”
Potential acquirers would be well served by guarding against over-confidence in their own judgment. Bazerman and Neale maintain that, “Potential acquirers should temper their optimism by recognizing that the winning bidder is likely to pay a far greater price than the target is actually worth.”
It will be interesting to watch the outcome of the bidding between T-Mobile and Sprint in the coming days, and, in the coming months, to see how much value was actually created for the winning suitor. Will the final outcome be a match made in heaven, or another classic case of the Winner’s Curse?
Copyright Nancy J. Fox, October 2012 – All Rights Reserved