How the Winner Lost

Earlier this week in class we learned about the winner’s curse when talking about auctions. The winner’s curse is a tendency for the winning bid to exceed the actual value of an item. As a result, whoever overestimates the value of an item the most wins the action. A number of factors can cause this phenomenon such as emotions or incorrect/incomplete information. In 2008 Tata Steel was looking to acquire Corus Group, another steelmaking company for a UK presence. Tata made an initial offering of $8 billion. Another company, CSN from Brazil, also wanted to buy Corus. The two companies engaged in a two week long bid war. Ultimately, Tata won with a final offer of $12 billion. Long story short, eight years later, Tata’s operation has lost $5 billion in the last few years, the company’s net debt totals about $11 billion and they are selling Corus.

Tata Steel fell victim to the winner’s curse. The initial offer of $8 billion even drew some red flags by experts that this was an overestimation of Corus’ worth. The winning bid of $12 billion left people stunned. Why did they make such an awful decision given the warning signals? I believe Tata executives let the competition of beating CSN get to them and they ended up being wrong about their thoughts on what the market was going to do. The winner’s curse happens often when there are firms bidding and re-bidding one another as we see in the case of Tata Steel.

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