Corus: Predicting prices
On 20 October, Corus, the Anglo-Dutch steelmaker, for 455p per share in cash - or £4.6bn in total - by Tata Steel of India. At the time, Corus's board who were advised by the leading City firms Credit Suisse, JP Morgan Cazenove and HSBC -“ said in a formal statement, that the takeover terms were "fair and reasonable". It recommended that shareholders accept the offer.
In the early hours of this morning, Corus ended up after a tense auction - at a price of 608p in cash or £6.2bn in total. That'™s 33.6 per cent more than Corus'™s board and its City advisors said was a "fair and reasonable" price just three months ago.
What on earth has been going on here? Did the Corus board, Credit Suisse, Cazenove and HSBC really not have the faintest idea what this business was worth? Just to be clear, they were advising Corus shareholders to sell out at 455p. And some presumably took their advice and sold in the market at prices well below 608p.
Maybe it was impossible to predict that a competing bid would emerge from CSN of Brazil. Corus'™s advisers told me at the time of the initial bid that the company had been hawked around the world for months and 455p was as good as it was likely to get.
I suppose it is possible that Tata wouldn't have made a formal bid without a recommendation from Corus'™s board. And CSN might never have come in with its offers if it didn'™t think the sale to Tata was almost a done deal.
But these events do not reflect well on the ability of a company'™s directors and its advisers to properly assess the value of the assets they in theory know best. They got it wrong to the tune of £1.6bn. Which is yet another illustration of why there are such massive opportunities to make supernormal profits for event-driven hedge funds. Efficient market theory? For the birds.
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Robert,
One of the reasons (among many) that this happens is that "advisors" remuneration is rarely properly geared in to success i.e. they will take a large "fair opinion" fee whatever the price is that Corus is sold at. They have assymetric risk, if the bid fails they get next to nothing and if the bid goes through they get their fee. However if the bid goes through at a higher price they affectively get the same fee unless they themselves have initiated the higher price. Something that rarely happens.
An equivalent is M&A, advisors get paid on the deal completing, not on the success to shareholders 3 years later.
Shouldn't advisors be paid on the stocks "relative" performance? This might encourage advice that benefits long term shareholders rather than deal junkies. Just a thought!
History shows that most Directors and Advisors have no idea the worth of anything nor how to run a successful business. They should be held to task for recomending the earlier bid. (Corus Board and Advisors).
Shareholders will be walking away with a good deal, I fear for the work force in later years.
Robert Preston's comments are surely unfair. At the time of the initial Tata bid it was some 12% ABOVE the stock market valuation. The eventual price has been dictated entirely by the risks which Tata/CSN were each prepared to take to get into the 'big steel' league. It would have taken a real crystal ball gazer to predict that competition with such high stakes. Let's hope that Tata have got it right and that the high price paid does not mean the early demise of steel in the UK and Holland - a real possibility which would have been much reduced by a lower selling price.
As a Corus employee for more than 30 years I have seen the steel industry in the UK go through many changes,rationisation,huge losses,huge profits,investment,and innovation.This was neccessary for the industry to survive in a very competitive and cyclical market.Corus at present is a world leader in research and technology and is investing 100's of millions in plant and process.The fact that Tata were prepared to pay for this shows how badly they need Corus. No doubt the UK steel industry as it is today will be decimated to finance the extra funds needed for the takeover. I fear for the future of the industry and the British Steel pension fund one of the few in the UK in profit!
Robert's views are not correct.These advisory firms were correct in their assessment.In the auction process no one can predict the price.TATA's are not much looking into the monetory value of CSN or this single specific deal. They have different objective. Thay want to keep their foot in to the Global Steel map. Advisors would not have aware of these TATA objectives.More over if TATA would not have come into picture then probably CSN would not have offered even 455 pens.TATA's are looking beyond the monetory value of this deal. They are looking into the opportunity to keep foot into global map.CORUS offered this opportunity. Thay paid the cost of this opportunity plus cost of CORUS.Opportunity cost differs from buyer to buyer.TATA's might have prepared to pay even more. Advisors calculated just the cost of CORUS which was fair.
I must respond to Sachin Paul's comment that "They (TATA) want to keep their foot into the Global Steel map. Advisors would not have been aware of theses objectives"
It took me less than 2 minutes searching the TATA website to find that following quote: "Tata Steel is continuosly marching towards becoming a global steel enterprise abd aspires to become a 15 MT steel producer by 2010."
How difficult was it for the advisors to find, read and understand the implications of the public statemnet?
i may be a bit slow but have received the offer to sell my corus shares today ,one thing puzzles me is that when the shares were consolidated in 2006 ,why were they still only worth 50p each as they were worth that before the 5/1 reduction?